Why are governments subsidising things that are already becoming cheaper?
Recently, there has been something contradictory about governments spending billions subsidising technology whose prices are already falling rapidly due to increasing economies of scale.
Take solar panels. According to the International Energy Agency (IEA), the price of solar photovoltaic equipment fell by almost two-thirds between its post-pandemic peak in 2021 and mid-2024. In 2023 alone, global solar module prices fell by almost 50%, partly because manufacturing capacity had expanded to around three times its 2021 level.
Electric vehicles are quite similar. Global battery pack prices fell by more than 25% in 2024 alone, while research suggests that the cost of EV batteries fell by almost 90% between 2010 and 2020. If market forces are already making these technologies cheaper, why are governments still subsidising them?
My opinion is that governments are often not simply trying to reduce today’s prices. They are trying to accelerate the process that makes prices fall.
This is particularly important because of learning by doing. As firms produce more, they discover more efficient production methods, reduce waste and benefit from economies of scale. A 2025 study of the EV battery industry estimated a learning rate of 7.5%: every doubling of accumulated production experience reduced battery costs by approximately 7.5%.
The significance of this statistic is not simply that batteries are becoming cheaper. It is that greater production itself contributes to lower costs. This gives governments a possible justification for intervening even when prices are already declining. A subsidy increases demand in the present, encouraging firms to expand production earlier than they otherwise would. If this additional production accelerates learning and economies of scale, the subsidy may bring forward a future in which the technology becomes cheap enough to survive without government support.However, falling prices alone do not necessarily mean that the market is producing enough of the technology from society’s perspective. Solar panels and electric vehicles generate benefits that are not fully reflected in their market prices, including lower carbon emissions and reduced air pollution. Because consumers and firms do not receive all of these wider social benefits directly, they may consume or produce less than the socially optimal quantity. Subsidies can therefore be justified as a response to positive externalities.
Strategic competition is also a reason why they continue to subsidise the industries.
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The solar industry demonstrates this clearly. The OECD found that solar panel production was the most subsidised industrial sector globally between 2005 and 2024, helping China become dominant across the solar value chain. The IEA estimates that China controls between 80% and 95% of global solar PV supply chains, depending on the manufacturing stage.
For other governments, therefore, subsidising domestic clean technology is not purely about correcting a market failure. It is also about reducing dependence on foreign producers, protecting supply chains and ensuring that domestic firms are not left behind in industries expected to become increasingly important.
However, this argument depends heavily on the assumption that subsidies actually generate additional production rather than simply rewarding consumers and firms who would have bought or invested anyway. If a consumer was already planning to purchase an electric vehicle, the subsidy does not create an additional social benefit; it merely transfers taxpayers’ money to that consumer. Therefore, the faster prices are falling naturally, the greater the risk that subsidies become inefficient because the government is increasingly paying for behaviour that the market would have produced without intervention.
There is also a stronger justification for subsidies where market prices fail to reflect wider social benefits. Solar panels and electric vehicles can reduce carbon emissions and air pollution, but individual consumers do not receive the full value of these benefits when making their purchasing decisions. This is a positive externality, meaning that private consumption may remain below the socially optimal level even if prices are falling.
Yet this raises an important question: when should subsidies stop?
If every government subsidises its own producers in response to foreign subsidies, this could create a subsidy race. Governments may end up spending increasing amounts protecting domestic firms, even when global production could be organised more efficiently through comparative advantage. What begins as an attempt to improve energy security could therefore lead to trade distortions and inefficient allocation of resources.
Subsidies can become difficult to justify once a technology has become sufficiently competitive. For example, in China, nearly two-thirds of battery electric cars sold in 2024 were already cheaper than their internal-combustion equivalents, compared with just 10% in 2018. Globally, government support for electric cars has also gradually become less important because in 2025, it represented just under 7% of total spending on electric cars, down from more than 12% in 2019.
I think this decline in government support is economically sensible. The statistics suggest that as electric vehicles approach price competitiveness, the justification for subsidising consumers purely to make EVs affordable becomes weaker. Continuing subsidies at the same level could create dependency and impose an unnecessary opportunity cost on governments: money spent subsidising mature industries cannot be spent on healthcare, education or technologies that are still at an earlier and riskier stage of development.
Therefore, subsidies should not be viewed as permanent support for industries. Their strongest role should be temporary: overcoming initial market failures, encouraging early adoption and helping industries reach economies of scale. As technologies become competitive, subsidies should gradually be reduced rather than removed.
Ultimately, governments subsidise things that are already becoming cheaper because the falling price may itself be part of a process they want to accelerate. But there is a fine line between helping an industry reach competitiveness and keeping it artificially alive. The real question is not whether governments should subsidise cheapening technologies. It is whether the additional benefits created by faster adoption are large enough to justify the cost to taxpayers.
