In today’s competitive world, companies try to have a continual improvement on the quality of their products to increase their market share. However, there are some features in the products, e.g. environmental issues, that improving them is not economically justified for private companies. It is while these features have vital effects on social welfare and sustainability. Governments enact environmental policies and intend to encourage the companies to improve these features through incentive/punitive mechanisms. From the mathematical decision making point of view, we face with a problem having two independent decision makers. The first decision maker is government as the leader whose aim is improving social welfare and the second decision maker is producer as the follower in the decision hierarchy aiming at maximizing his profit. In this paper, this hierarchical game is modeled as a bi-level programming (BLP). The efficacy of model and solution method is evaluated by Iran’s car market data. The results support the government financial incentive/punitive mechanisms in production policies of producers in favor of social welfare and sustainability
