1. Some people argue against government subsidies for renewable energy, saying that it is inefficient and masks the true cost of energy production. Are they correct? Why or why not?

It does mask the true cost, but only in the short term. Subsidies are, by design, not meant to last forever (all US federal government evidence to the contrary); once the technology has improved to the point where it can be competitive without the subsidy, the subsidy should disappear.

2. Illustrate the impact of a subsidy on total consumption and price of renewable energy (say, wind power). Use a graph of marginal benefits and costs to highlight the difference between social and private marginal costs of renewable energy production.

In the case of a production externality, such as with renewable energy, social MC should be lower than private MC, indicating the presence of the subsidy. Total consumption should rise, and the overall market price (inclusive of subsidy) should increase as well.

3. What impact does the increase in technology have on the price of renewable energy? Why?

As technology advances, it should become cheaper to produce renewable energy. As the cost of production falls, so should the market price.

4. What is the difference between requiring a minimum production of renewable energy and paying a subsidy for increased production?

In theory, the quantity increase should be achievable under either method. Free-market forces would suggest that those who can accomplish the goal more cheaply would do it to receive the subsidy, rather than forcing everyone to have a more evenly distributed burden to bear.

Multiple Choice/True False Questions