California will hold a hearing this week on offering a $4,500 subsidy for each pure electric vehicle sold in the state, up from the current $2,500, even as customers from Tesla Inc. and General Motors Co. face the loss of even bigger federal credits.
The federal government now offers a $7,500 tax credit on electric vehicles sold. The credit is designed to start ratcheting downward once the companies have grown enough to sell a total of 200,000 vehicles each. Tesla passed this threshold in July and GM is getting close.
The state’s current $2,500 electric-car rebate comes from a different source: the purchase of credits to comply with the state’s cap-and-trade program for reducing carbon-dioxide emissions.
Electric Cars are merit goods that are under-consumed. By the government imposing this subsidy, the price for electric cars will decrease the quantity will increase.
The marginal social benefit is higher than the marginal private benefit, thus there’s underallocation for this product. The distance between the two curves represents the external benefit that the good brings to the rest of the society.
The subsidy is a policy by the government to correct the welfare loss in order to reach the aim of encouraging production and consumption of the product. After the policy, social optimum will be acheived, at Popt and Qopt.