electric car subsidy

PriceOf Electric

Cars

Quantity of Electric Cars

Pe=$40,000

Qe

D*

S*

“A”

Market for Electric Cars

Here is the Market for Electric Cars in a steady-state equilibrium.

The Market Price the Buyers pay and SellersReceive is $40,000 and the Market QuantityDemanded and Supplied is “Qe”.

PriceOf Electric

Cars

Quantity of Electric Cars

Pe=$40,000

Qe

D*

S*

“A”

Market for Electric Cars

Q S.O.

“B”

“C”

Assume that Electric Cars have “Spillover Benefits”to society. This suggests that we would be better offhaving MORE of this type of car on the road.

In other words, the “Socially Optimal” number of electriccars is HIGHER than what the Market currently demandsand supplies.

Assume the Socially Optimal (“S.O.”) level of Electric Cars is “Q S.O.”

PriceOf Electric

Cars

Quantity of Electric Cars

Pe=$40,000

Qe

D*

S*

“A”

Market for Electric Cars

Q S.O.

“B”

“C”

P Seller $45,000

P Buyer $35,00

At “Q s.o” we intersect our Demand Curve (Point C) at a lower price --$35,000 and our Supply Curve (Point B) at a HIGHER price ---$45,000

In order for sellers to increase their Quantity Supplied to “Qs.o.” theyrequire the price they receive to be $45,000.

In order for buyers to increase their Quantity Demanded to “Qs.o.” they require the price they pay to be $35,000

How do we reconcile this?...

PriceOf Electric

Cars

Quantity of Electric Cars

Pe=$40,000

Qe

D*

S*

“A”

Market for Electric Cars

Q S.O.

“B”

“C”

P Seller $45,000

P Buyer $35,00

$10,000 Subsidy

…With a Subsidy, of course. In the example from the articlethe proposal is for a $10,000 Tax Credit to buyers of Electric Cars.

This means that whatever dollar amount of Federal Income Tax they might owe at the end of the year they can subtract $10,000 from that Tax bill. NICE!!

Here is where it gets tricky. SELLERS KNOW THIS SUBSIDY IS AVAILABLE to theBuyers of Electric Cars. When they increase the Quantity Supplied from Point “A”to Point “B” along the Supply Curve they are going to charge a higher price for thecar at the point of purchase.---to $45,000.

PriceOf Electric

Cars

Quantity of Electric Cars

Pe=$40,000

Qe

D*

S*

“A”

Market for Electric Cars

Q S.O.

“B”

“C”

P Seller $45,000

P Buyer $35,00

$10,000 Subsidy

After factoring in the $10,000Tax Credit the Buyer effectively pays only $35,000 for the car. BUT by paying $5,000 more for the car they are really only netting a $5,000 overallbenefit from the transaction ($10,000 tax credit minus the $5,000 increase in price of the car)

Where did the other $5,000 go? To the Seller of the car! They reaped some of the surplusyou received from the Tax Credit.

That does not seem “fair” now, does it?

PriceOf Electric

Cars

Quantity of Electric Cars

Qe

D*

S*“A”

Market for Electric Cars

“B”

“C”

P Seller $40,000

Q S.O.1

$10,000 Subsidy

P Buyer $30,000

Q S.O.

The ONLY way this scenario does not play outIs if the Supply of Electric Cars is PERFECTLY ELASTIC.

At $40,000 the Quantity Supplied will be enough to meet Market Demand and the Point of Purchase price will not change.

In this case, the buyer will retain all its due surplus andeffectively get an Electric Car at $30,000 instead of $35,000. We will have EVEN MORE Electric Cars on the road (Q.so 1).

How many of you believe THIS is the way it will work out?

….Me neither…