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5 months ago
Write a short note on the costs of subsidization.
Business and Its Environment
Edition: 7th
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5 months ago
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The direct costs of subsidies such as grants and loan guaranties are the corresponding government budget expenditures and liabilities. Those expenditures ultimately require higher taxes, which distort economic activity, resulting in inefficiencies. Subsidization in the form of high feed-in tariffs raises electricity prices, which also distorts economic activity. Higher costs to businesses reduce their competitiveness, which reduces employment. Higher electricity prices also were regressive, harming low-income households more than high-income ones. U.S. consumers had benefited from the cost-efficient location of production in China and other low-cost countries, even though it meant the loss of high-paying jobs in the United States.
Direct grants required annual appropriations by a legislature whose members faced elections. High feed-in tariffs were authorized by legislatures but once authorized remained in place. The tariffs required no appropriations and were set by regulators who in most states were appointed rather than elected.
The cost of the high feed-in tariffs was paid by electricity customers through higher prices, and households were poorly organized to deliver political action to reduce the cost. Moreover, many consumers were happy to pay higher prices to support renewable power.
Commercial and business customers, however, were better organized and motivated by competitiveness considerations. These customers posed a threat to high feed-in tariffs. Although renewable energy production such as solar and wind power was not cost competitive and hence was dependent on subsidies, many smart grid applications were driven more by opportunities for efficiency than by government support.
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