Germany will subsidise electric car purchases to give a jolt to sluggish growth in the sector and help meet national climate goals with zero-emission mobility, the government said Wednesday.
Car buyers will receive €4,000 ($4,500) when they choose a purely electric vehicle and €3,000 for a plug-in hybrid, with the cost shared 50-50 between the public purse and car makers.
Electric vehicles are merit goods as the consumption of electric vehicles benefit third parties. This also means there are positive externalities of consumption. However electric vehicles are under-consumed in Germany resulting in market failure and under-allocation of resources. This subsidy aims to correct the market failure through a subsidy which is a market based policy that lowers production costs for producers and the price paid by consumers. Through a subsidy the market failure can be corrected.
However a subsidy does have certain negatives impacts. Subsidies come from tax revenues which are paid by the general public. However, not everyone will benefit from these subsidies therefore it is not necessarily fair. In addition, subsidies come with opportunity cost, the government revenue spent on subsidies could, perhaps, be better spent elsewhere.