Aguadilla, Puerto Rico, where temperatures average 78° F., has a year-round ice skating rink with laser lights, a disco ball and steady music.
Used by the Puerto Rico Ice Hockey Association, the Aguadilla ice rink is a chilly (for Puerto Rico) 60° to 65° F.
Where are we going? To the impact of a government subsidy.
Power For the People
Puerto Rican towns and cities get free electricity. When a city does not have an electric bill, it can afford to own restaurants and hotels, it can light up a waterfront and sports stadium and yes, it can build an ice rink. It can save so much money that the disabled receive free wheel chairs, a city’s debt becomes a surplus and low income housing is renovated.
There is only one problem.
Free electricity is expensive. The source of all that power, the Puerto Rican Power Authority (Prepa) owes $9 billion. Only by cutting its debt payments to bondholders–perhaps by half annually during the next five years–can it pay back some of what it owes. In addition, its generating facilities are antiquated and inefficient. So its power costs more than necessary to produce and its revenue is lower than what it should be.
Our Bottom Line: Unintended Consequences
Subsidies can have unintended consequences such as the costs the IMF has estimated below.
To the IMF’s list of externalities, we can add a Puerto Rican ice skating rink.