Subsidies to solar panels generally

• A. Subsidies improve government budgets but reduce consumer welfare.
• B. Subsidies lower consumer costs for buyers or producers, shifting curves to increase adoption and welfare.
• C. Subsidies increase production costs for producers, reducing output.
• D. Subsidies have no effect on market outcomes.

Answer: (B)

Subsidies reduce the cost of solar panels, making them more affordable and encouraging more buying or production. When buyers receive a subsidy, the net price they pay falls, so the quantity demanded rises. When producers receive a subsidy, their production costs fall, so they’re willing to supply more at each price, shifting the supply curve to the right. In either case, more solar panels are adopted, increasing welfare because the gains from trade—consumers enjoying lower energy costs and producers benefiting from higher sales—rise. The subsidy is financed by the government, but the direct market effect is lower costs, a shift in the relevant curve, and greater adoption and welfare.