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2008-2009 Essay Contest Standard Economics Second Place Essay

The Government's Involvement in Energy Markets

Nicole Bergman
Little Falls Community High School
Little Falls, Minnesota

Everybody wants oil. Not a day goes by that oil does not play a role in an American's life. To many peoples' dismay, oil prices are rising. People are crying out and asking the government to lower prices; however, that is not what government needs to do. Lowering prices would only lead to an increase in demand, and eventually, a major oil shortage. What government needs to do is encourage the use and development of alternative energy sources. Government can do this through tax policies that encourage families and businesses to invest in products that create and use alternative energy. Government can also encourage investment in the research and development of alternative energy sources through providing research and commercialization grants, as well as through investment tax credits. Finally, government must work to ensure the free movement of the traditional energy resources, such as oil, while new technologies are being developed.

Researchers have already been developing alternative energy sources for homes and business. Renewable sources such as water, wind, geothermal, biofuel, and solar power have been in development for several years. Unfortunately, many of these alternatives are terribly expensive so very few people are using them. In other cases, the investments in storage or transmission systems make small alternative energy projects costly to start up. Fixed costs are high; therefore, many people are opting against such investments. What the government should do is promote the use of these energy sources through some sort of incentive such as tax credits or deductions to the users of these sources. For example, currently in Minnesota, according to Stephen Spuiell and Kevin Williamson, some "farms are receiving 1-1.5 cents-per-kilowatt of hours provided from hydro plant facilities." Minnesota also has a Solar-Electric Rebate program that "provides a rebate of $2.25 per watt DC, up to a total rebate of $22,500, for photovoltaic systems installed after July 1, 2008." (Hagen, Kevin) Although consumers are still paying more for these renewable products, in the long run, they will be saving money. This will help create a level of demand high enough for business to make a commitment to invest in alternative energy technologies.

Research into new technologies is costly, and when businesses do not see an immediate return on their research investments, they often focus on areas where they are more likely to see that return. It is the government's role then to allow companies to gain some type of short term benefit from a research investment. Traditionally, this has been done through investment tax credits and direct funding of a company's research. It also means research through government sponsored laboratories and making access to that research available at a reasonable cost through private businesses. New technological development and research will also create a number of new jobs. A good example of this model in the 20th century was the U.S. space program. With the goal to put a man on the moon before the Russians, the U.S. government invested resources in research and the development of the technologies used to reach that goal. The technologies developed during the space race are found in many of the products we use every day today and have been a great benefit to society.

The development and commercialization of alternative energy technology will take some time. During this development time the government must make sure the U.S. has access to some of our more traditional sources of energy. While recognizing that high energy costs will speed the development and use of alternative energy technologies, steady and reliable sources of traditional energy is needed. Government's role then is to ensure a safe and stable market, which can deliver the energy resources our country needs at a reasonable price. They can do this through access to certain reserves of energy that are currently available. Government can also accomplish stable energy markets by developing relationships with energy producing countries that are mutually beneficial.

All of the recommendations discussed above have a cost associated with them. Some of these costs are direct such as grants and tax credits. Others are more difficult to measure such as the political capital used to develop relationships with energy producing countries. Also, government expenditures should typically require a revenue source, usually through taxes. However, taxes can be a burden on economic development in other areas of the economy. There is also the opportunity cost of having resources diverted from research areas such as health care or food production into alternative energy that are difficult to measure. However, the benefits gained from the government maintaining the free movement of traditional energy resources and encouraging the use of alternative energy sources, as well as the investment in the research and development of alternative energy sources, outweigh all the costs.

Works Cited

1. Five Principles for US Energy Security,,
Butler, Stuart M. and Holmes, Kim R.

2. Lowering Oil Prices will Pull U.S. Economy out of Dregs,
Yale Daily News, Wagener, Trevor.

3. Minnesota Incentives for Residential Alternative Energy Systems, Hagen, Kevin.

4. Twelve Principles to Guide U.S. Energy Policy The Heritage Foundation, Butler, Stuart M. and Holmes, Kim R.

5. US Energy Markets and the Big Three: Roles of Government, Socyberty, Mar.1, 2009.