Spain, Solar Power & Subsidies

In an interesting article, the New York Times reports on the problems that occur when governments set subsidies and the subsidy is too generous. This is what happened in Spain, and we see from the article that the subsidy creates inefficient economic incentives.

When firms costs are reduced with the subsidy for solar power, firms may overproduce the production of solar panels, they may not produce solar panels of high enough quality, and thus even though they are produced, may not be demanded by final customers, and may locate solar power plants in inefficient locations - all to get the government subsidy. Each of these were mentioned in the article. Not only that, the subsidy is a drain on government resources, taking money from other government services.

UPDATE 8/1/10: Spain reduces their subsidies for electricity generated by solar power.