2020 IB Extended Essays

Price of solar panels per kW ($AU) 900

Figure 1.1 $100 Subsidy diagram

S1

S1 + Subsidy

800

700

600

P1 P2

1 2

500

400

300

200

100

S

0

100 200 300 400 500 600 700 800

Quantity of solar panels

Q1 Q2

It is important to note that Figure 1.1 is not using real data, due to changing prices of solar panels

and inconsistencies with solar panel providers such as different sizes and prices.

The shift in supply curve drops the price by $100 (the amount of the subsidy) from P1 to P2. It also

increases the quantity’s supplied and demanded by 100 units as well. While subsidies do have

benefits such as, decreasing costs and allowing local businesses to become competitive worldwide. It

is important to remember that there are still negative aspects of it such as according to

www.economicshelp.org, it could make a firm become inefficient with their production as they do

not have to compete with foreign producers (Pettinger, 2019). On top of this, a subsidy creates a

welfare loss seen in Figure 1.1 above.

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