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	<onlyinclude>A '''pigouvian subsidy''' is a [[subsidy]] that is used to encourage behaviour that have positive effects on others who are not involved or society at large.</onlyinclude><ref>A. Goolsbee, S. Levitt and C. Syverson. ''Microeconomics''. New York: Worth Publishers, 2013, pp. 656.</ref> Behaviors or actions that are a benefit to others who are not involved in the transaction are called [[positive externality \| positive externalities]]. This is closely related to the idea of a [[pigouvian tax]].		<onlyinclude>A '''pigouvian subsidy''' is a [[subsidy]] that is used to encourage behaviour that have positive effects on others who are not involved or society at large.</onlyinclude><ref>A. Goolsbee, S. Levitt and C. Syverson. ''Microeconomics''. New York: Worth Publishers, 2013, pp. 656.</ref> Behaviors or actions that are a benefit to others who are not involved in the transaction are called [[positive externality \| positive externalities]]. This is closely related to the idea of a [[pigouvian tax]].

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	==References==		==References==
	{{reflist}}		{{reflist}}
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Jmdonev: 1 revision imported: From the summer

2016-09-17T22:29:54Z

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Jmdonev at 17:31, 4 September 2016

2016-09-04T17:31:38Z

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[[Category:Done 2016-04-30]]
<onlyinclude>A '''pigouvian subsidy''' is a [[subsidy]] that is used to encourage behaviour that have positive effects on others who are not involved or society at large.</onlyinclude><ref>A. Goolsbee, S. Levitt and C. Syverson. ''Microeconomics''. New York: Worth Publishers, 2013, pp. 656.</ref> Behaviors or actions that are a benefit to others who are not involved in the transaction are called [[positive externality | positive externalities]]. This is closely related to the idea of a [[pigouvian tax]].

==Positive Externality==

A '''positive externality''' is something that enhances society as a whole. It results from an economic transaction that has positive external effects on others not party to the transaction.

One example of a positive externality is the market for education. The more education a person receives, the greater the social benefit since more educated people tend to be more enterprising, meaning they bring greater economic value to their community.<ref>J.Black, N. Hashimzade, and G. Myles. (2009) "Externality." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1134?rskey=tR8JO1&result=5.</ref>

Another example is behaviour that reduces [[pollution]] that imposes a negative effect on society. Assume a government wants to reduce the dependence of their country on [[fossil fuel]]s, the government might give a subsidy to homeowners who buy [[solar panel|solar panels]] for their house to reduce the amount of [[electricity]] they draw from the [[grid]] that is powered by [[coal]].<ref name=IPCC_SRREN> Verbruggen, A., W. Moomaw, J. Nyboer, 2011: Annex I: Glossary, Acronyms, Chemical Symbols and Preﬁxes. In IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation [O. Edenhofer, R. Pichs- Madruga, Y. Sokona, K. Seyboth, P. Matschoss, S. Kadner, T. Zwickel, P. Eickemeier, G. Hansen, S. Schlömer, C. von Stechow (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.</ref>

If the government offers a 20% subsidy on residential solar systems and the cost of installing a system of panels that can power the house is $20,000 then the cost to the homeowner will be $16,000. The subsidy both encourages the consumer to buy the cheaper product and encourages the seller to continue producing and selling the product as they still receive the full price of the product. In short, a consumer subsidy increases [[demand]] and lowers price for the consumer.

==Effect of a Consumer Subsidy on the Market for Solar Panels==

[[File:Pigouvian Subsidy1.png|450px|thumb|right|Figure 1. The effect of a consumer subsidy in the market for solar planes, which increases demand and lowers the price the consumer pays while maintaining producer reveneue.<ref>A. Goolsbee, S. Levitt and C. Syverson. ''Microeconomics'', 649.</ref>]]

*At '''Point A''' the market is in equilibrium, the price '''(P1)''' is equal to the quantity supplied '''(Q1)'''.
*When the government introduces a subsidy to the consumers, the demand for the panels increases overall, there is a shift in the [[demand | demand curve]], denoted by the '''Green Arrows'''.
*Producers respond to the increased demand with a increased supply ('''(Q1)''' to '''(Q2)''', the price rises as a response to the increased demand ('''(P1)''' to '''(P2)''')<ref>H. Kohler. ''Intermediate Microeconomics: Theory and Applications''. London: Scott, Foresman and Company, 1990, pp. 562-564.</ref>
*The price to the consumer stays low however as the subsidy negates the normal [[market force]]s that would make the consumer pay the higher price..
*The subsidy encourages consumers to buy more solar panels but keeps the price the same for the producer.
*The '''Red Triangle''' represents the [[deadweight loss]] (DWT) that results form the subsidy, the cost of the subsidy decreases the competitiveness of the market. However, the economic inefficiency is offset by the social benefit of reducing [[pollution]] from reliance on fossil fuel [[electricity generation]] methods.

==References==
{{reflist}}

Pigouvian subsidy - Revision history

Jmdonev: 1 revision imported

energy>Jmdonev at 21:25, 25 June 2026

Jmdonev: 1 revision imported: From the summer

Jmdonev at 17:31, 4 September 2016