German economy ministry extending subsidies for electric carsThis article states that Germany’s economy ministry wants to extend subsidies of ‚4000 on the purchase of electric cars. Subsidies are incentives given in the form of monetary payment by the government to a firm for the purpose of increasing the production of a good or service during a given period of time. With the subsidies, they aim to increase the sales and demand for electric cars which are environment friendly while decreasing the price by the end of 2020.
Demand is the quantity of goods or services that consumers are willing and able to purchase at a given price in a given time period. In addition, the subsidies are to respond to the diesel emission scandal in the past three years at the country’s auto industry. The diesel emission had negative externalities of production to the environment such as burning of fossil fuels releasing gases like carbon monoxide which is very dangerous to its consumers.
Negative externalities of production occur when the production of a good or service has negative impacts on the third parties in the society and these usually have environmental impacts. Negative externality of diesel carsFig 1.1 negative externality of consumptionSubsidies for electric cars in GermanyFig 1.2 Germany’s market of electric cars after subsidies are imposed In fig 1.1, the negative externalities of consumption of diesel cars make the marginal social benefits less than the marginal private benefits this means that the private utility is diminished by the negative utility suffered by the third party. Diesel cars consumers enjoy their own private benefits neglecting the external costs such as lung diseases(bronchitis) for others like pedestrians. Consumers will maximize their benefit consuming at a level where MSC=MPB. Meaning they will over-consume at Q1 units at P1. The socially efficient output is represented as Q* and so there is over consumption of Q1 to Q*. Because MSC is greater than MSB for diesel cars, there is a welfare loss to the society and market failure. Welfare loss occurs when the allocative efficiency is not met due to the misallocation of resources.From fig 1.2, the downward shift of the supply curve from S to S +subsidy is as a result of the ‚4000 subsidy. They are equivalent to reducing the cost of production making production at each price profitable for the producers and solving welfare loss represented by the triangle a b c . . This is known as the monetary value of the subsidy(vertical distance between S1 and S+subsidy). As a result, a new equilibrium is formed in the market from P1 Q1 to P2 Q2 where the price falls from P1 to P2 and quantity increases from Q1 to Q2. Government total revenue is represented by the vertical distance from P2 Q2 b to d to e. Producers initial revenue was P1,a Q1,0, but when the subsidy is added their total revenue is e,d Q2,0. It should be noted the total revenue for producers is higher than that of consumers and government. This is because profit maximization being their aim with the subsidy they can either decide not to use all for the cars most likely keeping some for themselves. Before the subsidy the consumers cost was P1 at Q1 units now with the subsidy they can buy at a lower unit P2 where they are saving P1 P2 Q2. However, there is extra expenditure by the consumers at P2 Q1 Q2 eb which goes to the producers. If the price were at P3 the consumers will benefit more. Additionally, the subsidy was used to respond to the diesel emission scandal which engulfed the auto industry in Volkswagen and Daimler for the past three years. This had an impact on its consumers such as inhaling carbon monoxide from exhaust fumes and combustion of nitrogen dioxide and Sulphur dioxide. By providing subsidies for electric cars(clean technology) which are energy renewable they aimed to make cars that don’t run on fuel. These electric cars are safer for the environment. They can be used as a step towards reducing Germany’s carbon foot print and the risk of lung diseases. Theoretically, in the long-run where the factors of production are variables(capital and labor) the incentive provided by the German economy ministry will increase the demand for electric cars however, it was recorded in 2018 that of new cars registration sales only 1% of them were electric cars. A possible reason for this could be the competition of other car firms in the market who offer lower prices. And moreover, the demand for cars is elastic where consumers can go for other alternatives. Hence the demand for cars will not change even if the price of electric cars is lowered.However, in the long-term at a given price the incentives provided will encourage consumers to buy electric cars therefore increasing the sales that is with a decrease in price from the subsidies there will be an increase in quantity demanded which increases the sales and supply for electric cars where the producers are willing and able to supply them at a given quantity demanded. With the subsidies for electric cars it will affect the producers (employees) in Volkswagen auto industry because they could lose their jobs with the subsidies provided for electric cars. In the short-run where factors of production are fixed, the government bear more cost than producers and consumers because they have to work out the opportunity cost in subsidizing the cars. Opportunity cost is the next best alternative forgone after a choice has been made. They could have decided to subsidize other goods with positive externalities such as education and health. Or they could have taxed cars that produce heavy greenhouses gases emissio