The Laval government is looking to reduce carbon dioxide emissions by introducing a consumer subsidy on electric vehicles to encourage consumers to purchase electric vehicles instead of gas-guzzlers.
The consumer subsidy, or rebate, increases the demand for electric vehicles and makes them more affordable for the average citizen. The equilibrium quantity shifts from Q* to Qsb to indicate the change in the quantity supplied and demanded after the implementation of the subsidy. The price received by producers increases from P* to Pp as the consumer subsidy is paid by the government instead of the producer. The consumer price paid falls from P* to Pc to indicate the savings received as a result of the rebate. The supply curve shifts from S1 to S2 to indicate the change in the supply curve as a result of the subsidy.
This graph displays how the positive production externalities of electrical vehicles are corrected through the government subsidy. The MPC curve shifts down to the MSC curve because the subsidy provided for each vehicle is equivalent to the external benefit. This means that the price shifts down from Pm to Popt to reflect the savings the consumer receives upon purchasing the electrical vehicle, and the number of vehicles sold shifts right from Qm to Qopt to reflect the increase in the number of cars sold after the consumer subsidy was instituted.
The electric car consumer subsidy, (Assistance from the government to individuals or groups of individuals, such as firms and consumers of an economy. It may come in the form of direct cash payments, provision of goods, etc…) is used to correct a positive production externality (A positive externality caused by production activities, leading to a situation where marginal social costs are less than marginal private costs.), which is a form of government intervention (The practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.) in the market. The rebate is beneficial for both producers and consumers. The rebate causes an increase in the demand for electric cars as consumers are able to save a large sum of money through the program. It is also beneficial for the producers as the increase in demand allows them to sell more vehicles to consumers, but their profits will not be negatively affected as the rebate is paid to the consumer by the government. The consumer subsidy also has positive effects on the environment. By driving electric vehicles, it increases the sustainability of fossil fuels, as electric vehicles do not require any fossil fuels to run. The electric vehicles are also considered a clean technology, as they only use natural resources and reduce negative environmental impacts. In addition, it also lowers the amount of carbon dioxide emissions. According to the CBC article, these vehicles “amount to an annual reduction of 455 tonnes of carbon dioxide emissions, or the equivalent of taking nine heavy trucks off the roads for a year”.
The consumer subsidy will have long and short term effects on society. In the short term, it has negative effects, as the subsidy requires the local government to allocate a chunk of their budget to the program, limiting their budget in other sectors of the government, and therefore lowering the capabilities of the government in other areas of concern. However, in the long run, it has a positive effect, as the increased amount of electric vehicles being driven will greatly reduce carbon emissions. In addition, the rebate for electric vehicles has many effects on various stakeholders. Producers benefit from the rebate as they can sell more cars, while still receiving the full amount from the consumer as the government covers the rebate amount. Consumers benefit from this as they are able to save large amounts of money on the purchase of electric cars. The rebate is detrimental for the government as they have to allocate a certain amount of money to the rebate, and therefore creating an opportunity cost for the allocation of money towards other parts of the economy. The rebate also benefits society as a whole because of the numerous environmental benefits, such as the reduction in the usage of fossil fuels. The rebate also has positive effects on the labor force, as the increase in the demand of electric cars causes suppliers to increase their supply in order to match the new demand, causing new jobs to be created.