Question

1. Review, in detail, the economics of the private decision to acquire solar panels.

a. Explain the private incentive to purchase a solar paneled home as expressed by the inequality:

Additional price of house + cost of maintaining panels over their life < savings in electricity bills over life of panels

b. Explain the private incentive to install solar panels as expressed by the inequality:

Cost of purchasing, installing, maintaining panels over their life - increase in value of house < savings in electricity bills over life of panels.

( 500words or above)

Answer 1

1.

Energy is one of the most used resources for various economic activities. On a micro levels, consumers or households use it for consumption purposes, various appliances, both in the modern kitchen as well in the home in general have made energy most useful source for consumer households.

Similarly, industrialisation and rapid development of various sectors-primary, secondary and tertiary, to speak on macro levels have always depended upon the use of energy so much so that even speculation in energy sector—buying of shares is gaining momentum.

However the point to note is that energy is subjected to over use—more than the power of regeneration, especially in the short run, this is leading to ‘power crisis’. It is also deepening the gap between the inequalities of energy distribution—The industrially advanced economies are having more access to energy than then the poor , developing nations where there is a visible need for energy and where the energy is still inaccessible freely( in terms of market demand and supply ) to all !!

Energy has composite ( many) uses, mankind has fully exploited this aspect of energy so much so that there is excessive use of energy which has lead to a situation where there is a explicit need to conserve energy and such an adage is now heard throughout the world—given the fact that energy , at any point of time , is limited in stock as compared to its demand. The excess of demand over market supply of energy is leading to mal allocation of this resource and hence a situation of market failure . Development of the various sectors largely depends upon the infrastructure facilities available and one of the basic facility is the easy availability of cheap energy.

A lack of it is a serious road block in the path of development. Hence alternative forms of energy have been developed, one such alternative forms is solar energy, the other substitutes are wind energy, geothermal energy, hydro energy and energy from the oceans. Of all these, energy from sun is more popular because of its ready availability. It has gained more popularity in western as well in developing nations, where use of solar panels which attract energy from sun and concert it into ‘usable ‘ energy form is gaining momentum.

a.

The Solar energy is an alternative to the conventional energy sources. It is used by households ( though not very widely used because of a lack of awareness about its usage.) . Solar panels are ‘plates’ that convert sun energy into consumable electricity . Theses are of two types, the inexpensive traditional panel which is cost effective and most economical, as compared to the more modern panels which have a greater power to absorb energy yet are priced slightly higher than the traditional plates.

In situation one, the additional price of the house plus cost of life time maintenance of panels is said to be less than the savings in electricity bills over life of panels:

This depends upon the opportunity cost of usage of solar panels over savings in power bills. There are many modern solar panels for household purposes that come at very low or economical rates. These panels are sold with a working assurance for long periods – ten to thirty years. They are more efficient in converting energy into quickly a source that can be easily used for household consumption purpose. For example , panel that has an outpower of 150-200 watts, can have a performance period of 25 years or more !! and is available at viable costs. The conventional sources of energy are subjected to higher prices, fluctuations in usage and is subjected to volatility in their availability. The demand for the regular energy is higher than its supply, hence the households are subjected to a varying power bill, for example in summer the air conditioners are used more frequently, in winter the heaters are used, depending upon the severity of the weather. Such usages along with rising use of electronic appliances in the household—since modern household gadgets have positive income effect , their consumption rises as the income of the households rises, this may lead to an excessive use of these gadgets, for example, a higher quality refrigerator, a home theatre for entertainment, gadgets like hair dryer for combing, a clothes dryer and so on. These are the items that are generally found in the upper income level households, which have a higher level of disposable income. In such cases the electricity bills are going to be progressively higher and will form a greater part of household expenditure items. A rise in power bill could prompt the households to decrease the demand for such appliances since demand for such appliance is ‘elastic’—meaning it is easily influenced by price—either its substitutes or complements. Electricity being a complement—a joint product that has to be consumed together along with such modern appliances, a rise in power bill will have an adverse effect in the market demand for these modern gadgets.

On the other hand the installation of viable solar panels that could save more and have lower maintenance costs over their life time and have longer life periods— an average panel can last more than 20 years, which is a very long period for households. Moreover , there are panels that absorb solar energy and convert into electricity even when there is low sun energy hence this option is viable.

Hence there is a greater incentive for the private benefit to be more while the society also benefits from the use of such panels since they lead to a cleaner environment around.

b.

In this situation, the initial cost of panel fixture, their maintenance over life time would be low as compared to savings of electricity bills especially as compared to life of panels.

The governments sometimes even offer subsidies to solar panel producing firms, in order to pursue their objective of encouraging economically viable -environmentally friendly energy sources. Subsidies increase the market supply and lower the price. While purchase pf such panels is an economical option to the consumers, use of solar panels will mean lesser pollution and more cleaner environment and hence the ‘value of homes’ in terms of both rental value as well as sale value rises. A rise in the consumption and use of solar panels in the neighbourhood will increase the land value of the community . This is beneficial for the consumers and households .

However, such advantages are not absolute and must be compared on a relative basis. Older homes will have a higher installation costs due to depreciation and low maintenance of the homes. Many times they are still ‘at the mercy of nature’—weather plays an important role in the productivity of solar panels. They are directly related to the power of sunrays. They require space for installation, many low income homes may not have enough roof space and may not even be considerable for panel installation. There are certain panels for which firms use toxic gases and chemicals for manufacturing, these could have an unhealthy impact on their usage.

However, in conclusion, solar panels are always a better substitute form of energy, especially for households since with growing awareness about environmental abuse and the need for environmentally friendly technology , market is gearing to supply such solutions.