Should environmental R&D be prioritized?

An innovator may not be able to capture the full social benefit of her innovation and, therefore, governments support private R&D through various measures. We compare a market good innovation-to develop a more efficient technology to produce a standard market good-with an environmental innovation-to develop a more efficient abatement technology-that has the same potential to increase the social surplus. In the first-best outcome, which can be achieved by offering an R&D subsidy and a diffusion subsidy, the R&D subsidy should be greatest for an environmental innovation, whereas the diffusion subsidy should be greatest for a market good innovation. The ranking of the two types of subsidies reflects that the appropriability problem is greater for an environmental innovation than for a market good innovation. (C) 2020 The Authors. Published by Elsevier B.V.