(This is the first article for the final quiz.)
Taxes help governments internalize negative externalities, and a subsidy can help internalize a positive externality. Solar energy creates positive externalities by limiting a country's dependence on outside sources and by minimizing the pollution usually associated with energy production. Thus, subsidies can be an appropriate way to encourage the development of solar energy.
However, just as there is an optimal tax, there is also an optimal subsidy. Not enough subsidy and you won't get as much extra solar energy as you'd like, while with too much subsidy you get more than is best. Sometimes too much of a good thing is great, but in Spain they had a subsidy for solar power that was so high that they even low quality plants were making a profit. Since those plants weren't sustainable, the Spanish government eventually had to decrease the subsidy, which led to many of the plants closing. Full story here.
