Wednesday, March 24, 2010

The Long Term Effects of Government Subsidies

There's never been a technology that was perfected before it was released.  Technology products like solar are introduced when their performance is not as well developed as established products along some dimension that mainstream customers have historically valued.

In order to become competitive over time technology-based products must be refined and improved by a sequence of users (starting with innovators and early adopters).  This dynamic, called the technology adoption lifecycle, is critical to the success of any new product or technology.  Without the adaptation and improvement that's demanded by early users, mainstream customers (the bulk of any market) will not adopt the product.

This is important because government subsidies often completely disrupt the technology adoption process.  When mainstream buyers of begin to enter the market because of a subsidy rather than product attributes, then forward progress on product adaptation tends to stop.

When I surveyed residential solar owners in the Sacramento area I found that the majority of them were late adopters.  That's because the local utility (SMUD) was offering 4 kW systems for only $7 per month. (after 10 years the customer could buy the system for $2400)  SMUD's offering, which included a lot of product intangibles, caused technology laggards to enter the market prematurely.

This subsidy by a utility in Sacramento completely disrupted the normal cycle of adoption that is needed for a market to be sustainable.  And when the subsidy is removed, the market adoption pattern must start over from the very beginning.  This is why government subsidies are so damaging over the long term.  It's more than just a loss of money when the subsidy goes away.  It's also a loss of a key component of sustainable market development: product and buyer evolution.

Related Articles:
Product Adoption Fundamentals

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