Analysis of Renewable Energy Subsidies and Their Economic Effects

This essay provides an analysis of renewable energy subsidies, exploring their multifaceted economic impacts. It begins by defining subsidies and their role in encouraging the production and consumption of renewable energy sources, such as solar and wind power. The essay highlights the benefits of subsidies, including increased savings for producers through tax credits and reimbursements, which can lead to industry expansion, job creation, and increased energy supply. It also discusses the benefits to consumers, such as tax credits for adopting renewable energy technologies. However, the essay also examines the potential downsides, particularly the impact on societal welfare. It explains how subsidies can lead to deadweight loss and distort the allocation of resources, even if they result in lower prices and increased production. The essay incorporates diagrams to illustrate the effects of subsidies on supply and demand, consumer surplus, and producer surplus. The conclusion summarizes the arguments for and against subsidies, acknowledging their role in promoting developing industries while also recognizing their potential welfare costs. The essay uses the provided article as a reference to support its arguments and provides a balanced perspective on the topic.

Surname 1
Name
Professor
Institution
Course
Date
Introduction
Subsidies can help industries in paying a proportion of the manufacturing cost of a
commodity or service by giving tax credits or even offering reimbursements. Subsidies can even
be used to pay a proportion of the cost a consumer would incur in purchasing a commodity.
States can offer subventions to encourage the manufacture and utilization of specific goods from
industries like the industries that deal with renewable sources of energy. The subsidies will allow
particular industries in producing high amounts of energy (Bronzini & Piselli, 2015, p. 45). The

Surname 2
supply of energy will therefore increase, and this will lower price and at the same time increase
the demand for the product (Bill , 2018).
Increased Savings for the Producers
As a result of increased tax credits or reimbursements, the lower general prices of the
renewable sources are offset by the savings that the manufacturers get. Through increased
savings, the investors will be more willing to expand their industries, and this will lead to
increased employment and continued production (Hong, Feng, Wu, & Wang, 2016, p. 36). This
will cater to the challenges of power shortage, and hence industrialization is highly boosted
(Bill , 2018).
Tax Credits
As far as the consumers are concerned, the government subsidies can assist the
prospective clients with the cost of a commodity, especially through tax cuts. A good example
for this is when the client refits their homes with the renewables sources of energy, and hence
they receive tax credits so that they can offset the high prices of purchasing new renewables
sources of energy (Von Moltke, McKee, & Morgan, 2016, p. 57). The consumers who purchase
solar panels in their homes, for instance, receive the tax credits that are meant to offset the
additional prices of purchasing new solar panels. The tax credits here are useful in for the
renewable energy industry by permitting more and more clients to buy the products that are
associated with these particular firms. This will lead to increased sales for these particular firms
and hence lead to economic growth.

Surname 3
Bottom line
The subsidies offered by the government can benefit a firm on two sides; the supplier
side and the consumer side. For the subsidies to be implemented, the federal government needs
to either increase taxes or reallocate the taxes from the current budgets (Guo, Guo, & Jian, 2016,
p. 59). Through the reallocation of taxes, the energy industry can then be offered subsidies and
hence be encouraged to produce more energy.
Effects of Energy Usage on the Welfare of Society
Competitive markets maximize welfare from the commodities that they produce. The
reason behind these desirable characteristics is because, in a case whereby the market is free and
in equilibrium, therefore the sum of consumer and producer surplus is as huge as possible.
When there is a little interference in the free market, the prices and quantity of a commodity will
be directly affected. This effect will reduce the welfare of the society as measured by the sum of
both the producer and consumer surplus (Bronzini & Piselli, 2015, p. 48). Subsidies that the
government provides will lead to a loss in consumer welfare even if we take into consideration
the low prices that the producers and consumers enjoy and also the increased production. The
decrease in societal welfare is called deadweight loss due to the subsidies.
Deadweight loss due to a subvention is a feature of economic inadequacy. It is the
lessening in the producer and consumer surplus. Subsidies cause more than the publicly best of
the good that the amount is produced. The good produced is sold at a low price. From the
economic point of view, subsidies distort the allocation of resources .when a subsidy is offered,
much of the societal resources will be directed towards that commodity.

Surname 4
This does not mean that the government is not supposed to use subsidies and tax cuts to
influence the market (Guo, Guo, & Jian, 2016, p. 154). In most cases, the society is prepared to
accept the deadweight loss due to subsidies in cases where the government is supposed to offer
services that the market and private sector in particular, not able to avail.
A unit of a subsidy paid by the government to the solar panel producers lowers the cost of
the solar panels and also their supply curves by the same amount which is equal to the subsidy
per unit output (Bronzini & Piselli, 2015, p. 152). It works the opposite as per unit tax. As the
unit subsidy gets into the market, then the cost and supply go down. After the government has
paid a subsidy, the cost of that subsidy is included at the final calculation of the surplus. The
latter is as shown in the diagrams below;
(Bronzini &
Piselli, 2015, p. 155).

Surname 5
The right side shoes supply and demand for renewable sources of energy. Consumer
surplus is shown by ‘a’ while producer surplus is shown by ‘b.’ After the introduction of subsidy,
the supply curve fall and price fall to P1. The latter is shown in the graph below
(Bronzini & Piselli, 2015, p.
156).
The supply curve will shift with the same amount and the consumer surplus increase. The
consumer will, therefore, become better off. The producers will as well be better off.
Conclusion
Subsidies are good in promotion and encouragement for the developing industries.
Subsidies lead to increase in production and encourage more purchases. Government subsidies
can also lead to increased savings for the investors, and this will make reinvestment easier.
However, it is important for the society to note that subsidies lead to welfare loss and this has
effects on the government too. The government has to pay bills for the subsidized products.
Market subsidies are important in cases where the government needs to influence the market.

Surname 6
References
Bill , M. (2018, March 23rd). Renewable Energy Subsidies -- Yes Or No. Retrieved May 4th,
2019, from Forbes: https://www.forbes.com/sites/uhenergy/2018/03/23/renewable-energy-
subsidies-yes-or-no/#6d6a94e16e23
Bronzini, R., & Piselli, P. (2015). The impact of R&D subsidies on firm innovation. Research
Policy, 42(6), 132-145.
Guo, D., Guo, Y., & Jian, K. (2016). Government-subsidized R&D and firm innovation:
Evidence from China. Research policy, 4(3), 2-14.
Hong, J., Feng, B., Wu, Y., & Wang, L. (2016). Do government grants promote innovation
efficiency in China's high-tech industries? Technovation, 34(6), 156-187.
Von Moltke, A., McKee, C., & Morgan, T. (2016). Energy subsidies: Lessons learned in
assessing their impact and designing policy reforms. London: Routledge.