Economic Regulations: Subsidies on Electric Cars

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1.0 Introduction

                Subsidies refer to the act of the government paying part of the overall cost to the firm. For that reason, the government gets to reduce the price of the targeted goods, therefore resulting in increased consumption. Availability of subsidies in the economy results in the shift of the supply curve to the right side. Thus, products are subsidized so that the economy, as well as the society, can enjoy positive externalities. According to Harris (2009) in a free market, it is often noted that positive externalities are ignored regarding consumption, for instance, using electric cars, people often fail to consider the reduction in pollution their decision creates. Hence, a free market is characterized by the ignorance of ‘external benefits’ derived from consumption of a certain good. Subsidies lead to greater social efficiency due to consumers paying socially efficient prices that are complemented by external benefits. For example, by the Municipality of The Hague subsidizing public transport by offering incentives for electric cars will encourage the residents to purchase electric cars, therefore “reducing the negative externalities to the society such as pollution” (Holzmann, 2012). In the long run, the subsidies on electric cars will result in the residents of the Municipality of The Hague changing preferences. However, the potential issue that might face the Municipality of The Hague is that the cost of the subsidy must be met through taxation. Consequently some taxation most notably income tax affect the incentive of people to work.

2.0 Type of market failure to be addressed

            The adoption of electric cars subsidies will tackle the pertinent issue associated with the environmental and natural resources. However, these incentives are often taken for granted due to the "polluter should pay" principle. Thus, economic theories aid in policy decision making that support the adoption of subsidies reflecting on the relevance and the areas to be dealt with adequately. It should be acknowledged that subsidies are more prevalent in energy and technology policy, for instance as depicted by the Municipality of The Hague.

            Consequently, externalities are an example of market failure addressed by subsidies (Lane et al., 2013). For example, if a cost or benefit associated with consumption of an individual good, that is not borne by an agent consuming that good, the obvious that cost or benefit is referred to as an externality.  Pollution is a by-product of petrol powered vehicles thus it is a negative externality associated with an external cost. As a result, the vehicle owners polluting the environment do not suffer the consequences of their actions. Thus, the use of electric cars is a positive externality connected to an external benefit; the residents within the Municipality of The Hague who will drive electric will provide benefits to other residents by reducing the levels of environmental pollution.

            Additionally, subsidies can directly be utilized for both positive and negative externalities (Graham et al., 2014). Positive externalities, for example, incorporation of enhanced energy technology such as electric cars the subsidy will be levied per unit of the externality. Nevertheless, negative externalities such as pollution from petrol powered vehicles; the subsidy is typically collected regarding abatement of the externality. Thus, if a common ground is attained, the abating producers, for instance, the petrol powered vehicle owners will achieve the same level of emissions with taxing each abated unit. In consequence, the subsidies will be used to promote the adoption of electric cars in the transport system. Hence, this subsidy will tackle the pollutants negative externality and the positive externality associated with the use of electric cars.

3.0 Sensibility in implementation of electric car subsidy

            The increase in demand and consequently the prices of petrol have led to the rise for calls for policy change to reduce the consumption of petrol, most notably in the transport sector by adopting electric cars. Thus, this has led environmental lobbyists to come up with more alternative fuel consumption mandates, with various governments under municipalities offering subsidies to purchase electrics cars. However, the economic reality of this subsidies are not yet at the original level, and the most immediate indicator will be when the financiers of the subsidies stop using taxpayers money to enhance consumption of electric cars. According to Koppelaar and Middlekoop (2017), affected governments should not provide additional taxpayer-funded subsidies for electric cars and should eradicate the policies already instituted.  Thus, instead of the government under municipalities issuing out subsidies, the private...