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What will be the effect on demand and/or supply for solar panels if the government begins...

What will be the effect on demand and/or supply for solar panels if the government begins to subsidize the production of solar panels? What will be the effect on the market-clearing price and quantity of solar panels produced?

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Answer #1

Subsidies result in an increase in the supply of the subsidized good. This is because the subsidy reduces the cost of production. Due to the subsidy on the production of solar panels the supply curve will shift down to the right from S1 to S2 as shown in the following diagram.

Increased supply will cause the price of solar panels to decline. The decline in the price will raise the demand for solar panels. As a result, the subsidy on the production of solar panels will cause the market clearing price to decline from P1 to P2 and equilibrium output to increase from Q1 to Q2.

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