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Tuesday, September 28, 2010

Subsidizing Renewable Energy

The discussion over renewable energy resources has been at the forefront of our political discourse for what seems like a lifetime now. Specifically, since the Carter Administration's brush with catastrophe in the form of gasoline rationing in the 70's, there has been a concern with the fossil fuel-based necessity to modern life. But how do issues surrounding the many concerns over energy sources play out in a market economy?

In an opinion article tucked away in September 22nd's Wall Street Journal, some concern was expressed over the amount of taxpayer money being funneled towards the "green" energy market by members of Congress. While the ethics concerning any interactions between a congressperson and anyone of special interests (another highlight of this article) may be questionable, that's for another blog and another time. However, this article actually made me think about the economic validity in terms of supporting and funding the renewable energy movement. As we all know by now, the first question: Is there a market failure here?

As the article states, "In a free energy market, companies succeed by producing cheaper, better products than competitors..." If this statement is accepted, would it not prove, according to our current understanding of market failures and justification of government coercion, that there is no need for government involvement with regards to the energy sector? According to this opinion article, the market's working as intended. If those who produce "green" energy can't hang with the competition, then the market will weed them out.

Don't get me wrong, I am all about research and development of new, cleaner, more efficient energy sources, not only due to the relevance of our dependence upon other regions of the world for this good, but also due to the environmental concerns that grow exponentially alongside the modernization and strengthening of other nations like China and India (and I am definitely not naive to the overwhelming power and influence of OPEC and oil in general). However, since as economists we take value judgments and preferences as given, and we should avoid externality abuse, the subsidizing of renewable energy seems to interfere with the essence of the market.

Of course, if I were to interject with an historical account as to progression of and interference towards the "green" energy movement over the past three or four decades, or environmental concerns in terms of both pollution and climate change, an extraordinary case could be made that these taxes are going towards a noble and just cause.

I don't know, just some food for thought/ spark of discussion. What do you guys think?

Source

"Why They Go Green," Wall Street Journal, September 22, 2010, A20.

Comments:
You might more directly consider the externality question by first noting that since the policy issue involves subsidies an economic justification would have to find the presence of a positive externality. Next you could offer some reasons people have suggested the subsidy is good. The you would want to consider whether this good fits the idea of a positive externality, and specifically talk about whether it fits the characteristics of being an unintentional, nonmarket, interdependence.
 
You know, that makes a lot of sense. I suppose I'm still digging myself out of the conceptualization that externality == negativity. I'm not sure why my mind strives to force that connection, but looking at this from the angle of positive externalities definitely opens up the discourse and debate quite a bit.

Thanks.
 
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