‘No one saves the planet if it hits their pocket’: UK heat pump installers fear planned subsidy cuts
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Taxes, subsidies and price controls, Externalities and the environment, Supply, demand and prices
What happened
The UK government is expected to cut subsidies under the boiler upgrade scheme in the budget; the scheme currently offers grants of up to £9,000 for sustainable heating alternatives, and heat pump installers are worried.
The economics
A subsidy is a government intervention that lowers the effective cost to consumers of installing heat pumps, aiming to correct a negative externality: the pollution costs of fossil-fuel heating are not reflected in market prices, so the subsidy shifts demand toward cleaner substitutes. Cutting the subsidy raises the relative price of heat pumps, which may reduce demand and affect orders and jobs in the installation industry.
Figures to quote
- up to £9,000
Evaluation
Subsidies are only one factor in installation decisions—upfront costs, home insulation and electricity prices matter too; the short-run demand effect and the long-run emissions effect may also differ, and the winners differ from those bearing the fiscal cost.
Practice question
Using the UK case of cuts to heat pump subsidies, evaluate the role and limitations of subsidies in correcting negative externalities.
Read the article ↗ · Draw the diagram in the Diagram Lab
Where it fits in the syllabus
- Taxes, subsidies and price controls: Indirect taxes, subsidies and maximum or minimum prices that governments use to change market outcomes.
- Externalities and the environment: Costs or benefits that fall on third parties without being priced, such as pollution and carbon emissions.
- Supply, demand and prices: How a change in demand or supply in one market moves its equilibrium price and quantity.
- IB Economics: Government Intervention and Market Failure, Demand, Supply and Elasticity
- A-Level Economics: Government Microeconomic Intervention, Market Failure, Supply and Demand
- AP Microeconomics: Supply, Demand and Market Equilibrium, Market Failure and the Role of Government
- IGCSE Economics: Government Intervention, Demand and Supply