I examine the optimal subsidy for renewable electricity in the absence of an optimal carbon tax. The current most common form of renewable subsidization, the fixed feed-in premium, provides a constant additive markup over wholesale prices. In contrast, the optimal subsidy encourages investment in the most socially valuable renewable production through a multiplicative markup. In the baseline model, this optimal ad valorem subsidy is easily calculable by policymakers, and the optimality of subsidies which increase with wholesale electricity price is robust to a wide range of extensions of the baseline model. I develop a simple simulation of the Iberian electrical grid and use it to estimate the welfare benefit of implementing the optimal subsidy relative to other subsidy structures. Furthermore, I show that the optimal subsidy is preferred by risk-averse investors to a fixed feed-in premium.

I examine optimal menu design for a monopolist facing increasing returns to scale, where consumers choose both whether to participate and how much to consume. I show how the access–usage trade-off and the set of served consumers shift as the monopolist’s objective ranges from benevolent planning to pure profit maximization, using electricity transmission as a motivating application.