e - -Brief Appendix - Trusted Policy Intelligence

The loss in efficiency can be illustrated by considering how the subsidy affects the commercial rate of return on the additional R&D performed. [...] In addition, some of the subsidy will be passed on to the consumers of the products developed from the subsidized R&D in the form of lower prices. [...] This possibility arises because increases in the subsidy rate generate benefits that are a constant share of the additional R&D induced by the 1 This is a slightly modified version of the discussion in Lester (2020). [...] Costs are a rising share of the additional R&D because increases in the subsidy rate cause the required private rate of return on R&D to fall at an accelerating pace, signalling a drop in the value of output. [...] In the absence of other costs, the net benefit would be maximized by setting the subsidy rate equal to the spillover rate, However, other costs increase relative to the spillover benefit as the subsidy rate rises; this reduces the net benefit and the optimal subsidy rate.2 2 The optimal subsidy rate would be higher in a co-operative setting, in which all countries set the subsidy rate equal to the.