Question

What will be the effect on the demand and/or supply curve(s) 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?

Answer 1

Given the market for solar panels with demand curve D and supply curve S, equilibrium is attained at a point where Demand intersects Supply at E.

If the government now subsidizes the production of solar panels, more producers will start producing solar panels. This is because inputs costs have decreased (due to government subsidy) and producers can now produce more solar panels at the same price. Thus, the supply curve will shift rightwards.

The new equilibrium will be attained at a point where old demand curve D intersects new supply curve S' at point E'. New equilibrium quantity is higher and the equilibrium price is lower than before.

Ans. Market-clearing price decreases and market-clearing quantity of solar panels increases.