Solar Energy and the Policies of First and Second Best

Abstract

Though most economists recognize the importance of first best and second best theories, very few realize the importance of applying these theories toward a rationale for government involvement in the develop? ment of solar energy In order to clarify the definition of these terms, first best energy policies are those which would increase social welfare even if the economy were functioning under conditions of perfect com? petition. Second best energy policies are those designed to increase social welfare in an imperfectly competitive energy sector of the econ? omy. [Yokell, p. 357] Both first and second best policies are explored in this paper as they relate to solar energy. Economists often advocate the elimination of the federal government from the energy sector of the economy as a step to reinstate conditions of perfect competition. This, however, does not account for the nonmarket benefits that can be attributed to solar energy but which are not cap? tured by the producers and/or consumers of solar energy systems. These benefits suggest that a first best policy would be for the federal govern? ment to support the development of a solar energy industry even if the energy sector of the economy were perfectly competitive. Jince the energy sector is not perfectly competitive, second best poli? cies are appropriate. Proof that the economy is not perfectly competi? tive and, therefore, needs second best policies are evident by: 1) utility companies that supply conventional energies at average cost instead of marginal cost; 2) the largely unpriced negative externalities resulting from conventional energy use; and 3) the past as well as current existing heavy government subsidies to conventional energy sources. The argu? ment developed in this paper is that the federal government will remain heavily involved in the energy sector of the economy and therefore should give more balanced support to solar energy. The first section of the paper explains the past and present govern? ment involvement in the energy sector of the economy. The second sec? tion builds first and second best rationales for government involvement