Improving Affordability and Accessibility of Modern Energy: Tax‐Cut or Direct Subsidy?

ABSTRACT

Promoting off‐grid solar (OGS) products is a cost‐effective way to expand access to modern energy. However, limited purchasing power in energy‐deficit regions creates an affordability gap, leaving the households most in need unable to afford it. This paper investigates the effectiveness of two key policies for promoting OGS adoption: direct subsidies providing financial support to consumers and tax cuts reducing firms' tax burden. We employ a three‐echelon game model comprising a government, an OGS firm, and consumers with heterogeneous affordability to delineate the applicability conditions of the two policies and identify their underlying mechanisms. Our analysis reveals that both policies can expand OGS coverage and generate a win‐win‐win outcome for the government, the firm, and consumers. The optimal policy choice is jointly determined by both consumer affordability and the tax environment. Under high‐tax environments, the optimal policy shifts from subsidies to tax cuts as consumers' affordability improves; under low‐tax environments, subsidies can unlock latent demand even when intervention would otherwise be unnecessary. The core difference stems from their price pass‐through efficiency. Contrary to the intuition that subsidies act directly on consumers and therefore achieve full pass‐through, we show that tax cuts deliver complete pass‐through, while subsidies are partially captured by the firm through strategic price adjustments.