An appropriate policy tool adopted by the government can induce small-scale photovoltaic (PV) installations to alleviate current environmental problems. In this paper, a Stackelberg game model is applied to explore the government's optimal incentive policy and residential prosumers' strategic choices in China's distributed PV market. Regional solar radiation intensity (SRI), Levelized cost of electricity (LCOE), and feed-in tariffs (FIT) are regarded as influencing factors that determine whether the PV investment is inducible in a specific region. The results show that government subsidy is gradually no longer required for smaller-capacity PV investment when the individual characteristics of residents are ignored but only economic benefits are considered. The contribution of government subsidy in the PV market has gradually changed from inducing residents to start investing in solar PV equipment to inducing investment in larger-capacity PV equipment. An appropriate government subsidy can reduce the restrictions of SRI, LCOE, FIT, and other factors on the residential installation. Meanwhile, the results demonstrate the optimal subsidy established according to specific regions can accurately induce residents and maximize the profits of government and residents, while the effectiveness of a unified subsidy policy is very limited. These conclusions can provide valuable insights for policymakers to develop effective and targeted policies.