The use of fossil fuels and nuclear energy for the production of energy services leads to considerable costs which are not covered by the market price of the services. Damage to the environment, for example, is paid for by society (see e.g. Hickel 1987, p. 44, Solow 1982, p. 32 or Kapp 1979). Thus these costs are called social costs, a term introduced by Pigou in his book “Wealth and Welfare” in 1912. Together with their positive counterpart (social benefits), they are termed external effects since they are external to the market process and the economic agents producing them (see Osterkamp/Schneider 1982, p. 15). Compared to the use of conventional non-renewable energy sources, the use of renewable energy sources produces very few or no external costs and may even cause positive external effects. This discrepancy, which is not reflected in the relative energy prices, causes a serious distortion of the energy markets. As substantial costs to society are not considered in the allocation process, wrong decisions are produced by the market mechanism (see Solow 1982, p. 32). In general, renewable energy sources are at an unjustified disadvantage with respect to their conventional competitors. Renewable energy sources are not utilized to their full competitive potential and are introduced into the market considerably later than the optimal time of market introduction based on their overall cost situation (including social costs).
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