A subsidy for solar panels

The chain in words

1. Step 1

   Before the subsidy

   A panel is installed for about 1,000 dollars and 50 thousand are fitted a month. The horizontal axis is thousands of panels per month. The vertical axis is the price paid per panel. The market starts at E₀.

2. Step 2

   Supply shifts right by the subsidy

   For every panel sold, the installer now gets 200 dollars from the government on top of the price. Installers will supply any quantity at a price 200 dollars lower than before, so supply shifts right. At the old price, installers offer more panels than households want: a surplus.

3. Step 3

   Price falls, quantity rises

   Installers cut prices to win customers. The lower price draws in households that had been on the fence, a movement along the demand curve. The market settles at E₁: a lower price and more panels fitted.

4. Step 4

   Who gets the subsidy

   Households pay less, installers receive the lower price plus 200 dollars, and taxpayers fund the gap. A subsidy is a tax in reverse: it lowers the buyer's price by less than the full 200 dollars.

Takeaway. A per-unit subsidy to sellers shifts supply right, lowers the price buyers pay, and raises the quantity sold.

Draw it yourself

More on the supply and demand graph