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Reuters: UK wind fail is catalyst for belated subsidy rejig

Article published: 8 September, 2023

IB Economics syllabus: Microeconomics (government intervention, subsidies, market failure, allocation of resources)

UK’s Wind Energy Situation: The Role of Subsidies and Market Forces

The UK has set its sights on becoming a leader in wind energy, but recent events have put this goal in jeopardy. The latest offshore wind auction resulted in no bids, despite prior warnings from developers. Moreover, this outcome has sparked discussions about the future of the wind energy sector in the UK, and the government’s subsidy structure, which was designed to incentivize wind energy projects, is now under scrutiny due to rising costs of turbines and other components. For instance, companies like SSE have opted out of the auction, as they feel the subsidies won’t guarantee a satisfactory return on investment. This situation highlights the importance of balancing government support and market dynamics in promoting sustainable energy solutions.

IB Economics Internal Assessment (IA) Commentary

The Reuters article provides an in-depth analysis of how government subsidies in the renewable energy sector can affect a market that’s subject to market failure. Wind energy has positive externalities, which means that the benefits of increased wind energy consumption go beyond individual consumers. A diagram depicting of positive production externality can show how this is the case. Then, you can use another one to show how subsidies could lower the cost and increase the volume of wind energy projects. This means that producers may benefit from a more favorable equilibrium, which is closer to the market optimum. With the help of subsidies, the market could move towards the socially optimal level of production, which would reduce the gap between marginal social benefits and costs.

Source of image: REUTERS/Phil Noble/File Photo

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