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Economics Microeconomics Commentery Draft

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7 views6 pages

Economics Microeconomics Commentery Draft

Uploaded by

Magdalena
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© © All Rights Reserved
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Title of the article Green protectionism comes with big risks

Source of the article The Economist

Date the article was published October 7th 2023

Date the commentary was June 28th 2024


written

Word count 729 words

Unit of the syllabus Microeconomics

Key concept Government intervention


The article “Green protectionism comes with big risks” puts forward the topic of dealing with

climate change. It emphasizes the urgent need for green transformation and presents the ways

countries tackle this issue.

The solution for this problem presented in this article is subsidies. Governments usually grant

subsidies in order to support the growth of particular industries or encourage production of

particular goods. The subsidies mentioned in this article were implemented in order to promote

the renewable sources of energy.

The implementation of a subsidy has positive consequences for both producers and consumers.

The fall in the price for consumers allow them to purchase more which makes them better off.

Producers receive higher price and produce larger quantity which results in the increase of

revenues. This situation can be observed on the graph below.

Figure1. Market after implementing a subsidy on green energy sources.


Vertical line represents the price of green energy sources and the horizontal line represents the

quantity of green energy sources. The market is in the state of equilibrium at price P E and

quantity QE. After granting a subsidy the price for consumers falls from PE to PC causing the

increase in the quantity demanded from QE to Qsub. The price received by producers increase

from PE to PP resulting in the increase of the quantity produced from Q E to Qsub. The demand

curve remains constant and the supply curve shifts downwards which means it increases.

As more green energy sources are supplied and used, fossil fuels usage can decrease. Fossil-

fuels and renewable sources of energy both satisfy the same need. It makes them substitute

goods. In case of substitute goods, the fall in price of one causes the decrease in the demand

for other. As governments are imposing subsidies on renewable energy sources, the demand

for fossil fuels is decreasing. This can be observed on the graph below.

Figure2. Green energy and fossil fuels as substitute goods


The vertical line presents the price of green energy usage and the horizontal one presents the

quantity of fossil fuels demanded. Initially, the market is in the state of equilibrium given the

price PE and quantity QE. Because of the subsidy, the price of green energy sources usage falls

from PE to P1. This allows more people to use it, therefore the demand for it increases.

Following the rule of substitute goods the demand for fossil fuels then decrease, being visible

as the rightward shift of the demand curve and the decrease in the quantity of fossil fuels

demanded from QE to Q1.

In order to enhance the green transformation, the subsidies currently placed on developing

clean-energy sources are higher. However, they are also structured differently. They are more

focused on creating jobs along with developing the sources of renewable energy. It is achieved

by the domestic-content requirements which put certain restrictions on the subsidies.

Governments grant the subsidies only if the products are manufactured mostly domestically. It

blocks foreign firms from supplying the domestic market with green energy sources, which can

result in slowing down the global transformation because “it will take years for countries to

build up domestic capacity in green energy and transport” as the article states.

When the foreign firms are blocked, the number of firms being involved in the production of

the green-energy sources on the domestic market is smaller. The decrease in the number of

firms causes the decrease in supply of such goods. The graph below illustrates such situation.

Figure3. Supply of green energy sources


As the change in the number of firms is considered a non-price determinant of supply the shift

of the whole supply curve can be observed, while the price remains constant. In this case,

because of the domestic-content requirements the number of firms decreases therefore, the

supply curve shifts upwards. This causes the quantity of green energy produced to decrease

from Q1 to Q2 while the price remains at P1.

As the issue of climate change is globally significant and requires urgent actions, the

governmental interventions such as subsidies aiming to enhance the green transformation seem

to be a good idea. However the form in which they are granted is a problem. In general it is

good to enhance the growth and development of the domestic markets in order to empower the

independence, but in this case the time is what matters.“The world needs to decarbonise fast”

states the article. Here countries should cooperate in order to quickly find the solutions for such

an important problem rather than creating the economic divisions.

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