March 01, 2023

The subsidies and taxes play the role of the carrot, i.e., subsidies, and the stick, i.e., taxes, in the Biden administration’s industrial policy. Broadly defined the taxes and subsidies are being actively used to push the economy towards desired outcomes, i.e., a green agenda that reduces emissions as well as other components of the Biden industrial policy. Yet even economists who do not share the administration’s views may accept the administration’s justification for some of the tax and subsidies if they are aimed at internalizing any external effect generated by the production and/or consumption of goods and services. Two possible justifications come to mind. One presumes that the market will eventually drive the global economy to the long-run equilibrium. In this case there is no external effect, and the industrial policy merely accelerates the speed of adjustment to the long run equilibrium. The second possibility is due to some sort of externality whereby the government believes that the costs of external effects on the environment and the economy in general are not fully incorporated in market prices, thus prompting the government to take action to eliminate or at least reduce the external effects. Either way the two possibilities give rise to an industrial policy, such as the Green Energy Agenda being pushed by the EU and US governments. The simple framework developed in this report we now proceed to evaluate some of the components of the Biden Administration’s Green Agenda.

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