This document discusses the market for electric cars and how a subsidy could increase the socially optimal quantity supplied and demanded. It shows the market currently at equilibrium with price $40,000 and quantity Qe. The socially optimal quantity Qso is higher due to spillover benefits. A $10,000 subsidy would allow buyers to pay $35,000 and sellers to receive $45,000, reaching Qso. However, sellers likely capture part of the subsidy by increasing the pre-subsidy price. The only way for buyers to get the full benefit is if supply is perfectly elastic and the price remains $40,000, resulting in an even higher quantity Qso1 at $30,000 for buyers.

1. Price
Of Electric
Cars
Quantity of Electric Cars
Pe=$40,000
Qe
D*
S*
“A”
Market for Electric Cars
Here is the Market for Electric Cars in a
steady-state equilibrium.
The Market Price the Buyers pay and Sellers
Receive is $40,000 and the Market Quantity
Demanded and Supplied is “Qe”.

2. Price
Of Electric
Cars
Quantity of Electric Cars
Pe=$40,000
Qe
D*
S*
“A”
Market for Electric Cars
Q S.O.
“B”
“C”
Assume that Electric Cars have “Spillover Benefits”
to society. This suggests that we would be better off
having MORE of this type of car on the road.
In other words, the “Socially Optimal” number of electric
cars is HIGHER than what the Market currently demands
and supplies.
Assume the Socially Optimal (“S.O.”) level of Electric Cars is “Q S.O.”

3. Price
Of Electric
Cars
Quantity of Electric Cars
Pe=$40,000
Qe
D*
S*
“A”
Market for Electric Cars
Q S.O.
“B”
“C”
P Seller $45,000
P Buyer $35,00
At “Q s.o” we intersect our Demand Curve (Point C) at a lower price --
$35,000 and our Supply Curve (Point B) at a HIGHER price ---$45,000
In order for sellers to increase their Quantity Supplied to “Qs.o.” they
require the price they receive to be $45,000.
In order for buyers to increase their Quantity Demanded to “Qs.o.”
they require the price they pay to be $35,000
How do we reconcile this?...

4. Price
Of Electric
Cars
Quantity of Electric Cars
Pe=$40,000
Qe
D*
S*
“A”
Market for Electric Cars
Q S.O.
“B”
“C”
P Seller $45,000
P Buyer $35,00
$10,000
Subsidy
…With a Subsidy, of course. In the example from the article
the proposal is for a $10,000 Tax Credit to buyers of Electric Cars.
This means that whatever dollar amount of Federal Income Tax they might owe
at the end of the year they can subtract $10,000 from that Tax bill. NICE!!
Here is where it gets tricky. SELLERS KNOW THIS SUBSIDY IS AVAILABLE to the
Buyers of Electric Cars. When they increase the Quantity Supplied from Point “A”
to Point “B” along the Supply Curve they are going to charge a higher price for the
car at the point of purchase.---to $45,000.

5. Price
Of Electric
Cars
Quantity of Electric Cars
Pe=$40,000
Qe
D*
S*
“A”
Market for Electric Cars
Q S.O.
“B”
“C”
P Seller $45,000
P Buyer $35,00
$10,000
Subsidy
After factoring in the $10,000Tax Credit the Buyer effectively pays only $35,000 for the car.
BUT by paying $5,000 more for the car they are really only netting a $5,000 overall
benefit from the transaction ($10,000 tax credit minus the $5,000 increase in price of the car)
Where did the other $5,000 go? To the Seller of the car! They reaped some of the surplus
you received from the Tax Credit.
That does not seem “fair” now, does it?

6. Price
Of Electric
Cars
Quantity of Electric Cars
Qe
D*
S*
“A”
Market for Electric Cars
“B”
“C”
P Seller $40,000
Q S.O.1
$10,000
Subsidy
P Buyer $30,000
Q S.O.
The ONLY way this scenario does not play out
Is if the Supply of Electric Cars is PERFECTLY ELASTIC.
At $40,000 the Quantity Supplied will be enough to
meet Market Demand and the Point of Purchase price
will not change.
In this case, the buyer will retain all its due surplus and
effectively get an Electric Car at $30,000 instead of $35,000. We
will have EVEN MORE Electric Cars on the road (Q.so 1).
How many of you believe THIS is the way it will work out?
….Me neither…