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6:38 pm - Tuesday May 23, 2017

Should government subsidize renewable energy sources such as wind, solar and ethanol?

| Economics | Rating: 4.5
by Numan

In capitalistic societies government subsidies carry an unpleasant tone as the purpose of a government subsidy is to encourage the private sector to enter an otherwise unworthy investment. As economists often preach subsidies and government interventions in markets often lead to inefficiency. As a result capitalistic societies subsidize to promote goal and ideals other then profit.

A brief view may lead us to think renewable energy is the same as any other business and should be pursued only if it economically feasible. A more careful look may convince us otherwise. I believe the case of renewable energy is different.

According to basic finance we should evaluate the economic feasibility of a project by comparing the present value of future cash flows to the investment required. If cash flows outgrow investment in present value terms the project is worthwhile.

My claim is that only a government is able to fully evaluate a project such as renewable energy and its future benefits (even in the form of cash flows). A private sector company will not take into account in its economical valuation many important aspects such as the following:

1) Prevention of pollution related sickness which is costly in terms of social security and healthcare

2) Prevention or reversal of global warming and its effects such as disastrous weather, catastrophic changes in climate and more

3) Control over foreign political influence as a result of control over resources results in increased political power

4) Renewable energy is infinite

5) Local economy derivative benefits

Only governments have the complete point of view required to make the real economic valuation for renewal energy projects. As a result governments should subsidize these projects. These subsidies should embody future benefit at the government level over private sector benefit.

Another aspect of renewable energy is the enormous investment required in infrastructures. As major infrastructure investments are often the same case as discussed above in terms of economic valuations these investment are often undertaken by governments and later leased to the private sector.

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