Question

Both Government and Opposition in New Zealand acknowledge that New Zealand needs to reduce its greenhouse gas emissions. To guide purchasing decisions of New Zealanders, government proposed to subsidise the price of imported electric and hybrid vehicles by up to NZ$8,000 and tax the import of vehicles with the highest greenhouse gas emission by up to NZ$3,000.[1]

Julie-Anne Genter says, “These policies are about making cleaner vehicles a realistic option for more New Zealand households and businesses.”[2]

Lawrence Yule responds “National supports incentivising people to buy electric vehicles, providing their lifestyle can accommodate them. From the surface this looks like a concept that is worth exploring, I have found however after investigation that it is unlikely to work.”[3]

The Ministry of Transport notes that, “New Zealand is well placed to benefit from electric vehicles. More than 80 percent of electricity is generated from renewable sources and there is enough supply for widespread adoption of EVs. Even if every light vehicle was electric, there is sufficient generation capacity to charge these provided the majority are charged at off-peak times.”[4]

Given what you understand about price elasticity of demand and supply, explain why electric vehicle prices continue to be so high in New Zealand. Use a suitable diagram to illustrate your answer.

Given what you understand about price elasticity of demand and supply, explain how the proposed "feebate" policy will affect consumer purchasing decisions of electric vehicles and vehicles with high greenhouse gas emissions ("gas guzzlers"). Use a suitable diagram to illustrate your answer.

Either using the same diagram, or a new one, explain the impact of the feebate policy on price in the two market segments. Explain how the benefit of the subsidy and the burden of the tax is likely to be shared between the consumers and vehicle importers. What impact would you expect the feebate policy to have on the price and quantity demanded of electric vehicles and gas guzzlers? What are the advantages to society of lowering the price of electric vehicles and increasing that of gas guzzlers? What are the disadvantages?

Based on your discussion, do you think the government’s intervening in the market of imported vehicles will be beneficial for society?

Answer 1

Figure-1 in the attached document below illustrates the market for Electric Vehicles(EVs) in New Zealand. The demand for EVs is denoted as D(EV) and the supply of EVs is represented as S(EV). The equilibrium price and quantity of the EVs in the market are pointed as P*(EV) and Q*(EV) respectively. Now, based on the report presented by the Ministry of Transport in New Zealand, the overall supply of the EVs is quite sufficient to accommodate the consumer demand in the domestic economy or market. Now, in such a scenario, if the price elasticity of demand for EVs is relatively inelastic implying that local consumers or buyers in New Zeland are relatively insensitive or unresponsive to any price change of the EVs in the market, the local suppliers have reasonable incentive to raise the market price of the vehicles and reduce the supply in the market. Now, such a market outcome has to be essentially facilitated by a relatively inelastic market supply of EVs as well signifying that the suppliers that even if the market price or the equilibrium price of the EVs is considerably high in the market, it does not incentivize the manufacturers or producers to substantially increase the production level which could subsequently lead to a price decrease in the market.

Figure-2 in the attached document below depicts the impact of the government subsidization of the EVs in the market for EVs. First, notice that due to the provision of government subsidy to the consumers or buyers of EVs, the overall market demand for EVs increases as indicated by a rightward or upward shift of the demand curve for EVs from D(EV)1 to D(EV)2 in figure-2. As a result of this increase in the total market demand for EVs, observe that the equilibrium price of EVs increases from P*(EV)1 to P*(EV)2 and the equilibrium quantity of EVs also further increase from Q*(EV)1 to Q*(EV)2 in figure-2. Now, importantly, observe that the original or the initial consumer surplus prior to the subsidization of the EVs has been represented by the area A+C and following the government subsidization the consumer surplus is denoted by the area A+B which essentially implies a decrease in the overall consumer surplus by the area C and a gain of area B following the subsidization. On the other hand, the initial producer surplus before the government subsidy is indicated by the area E and after the subsidization, the producer surplus is denoted by the area E+C+D thereby implying an overall gain in producer surplus by area C+D following the government subsidization of the EVs. Furthermore, the overall loss or waste to the society or the deadweight loss due to the subsidization of the EVs is indicated by the area F in figure-2. Figure-4 illustrates the impact of government subsidization on the market for Gas Guzzlers(GGs) which essentially results in both lower equilibrium market price and quantity of GGs in the domestic market. It adversely impacts the producer surplus as due to lower market price and quantity the producer surplus is reduced and also affects the consumer surplus due to lower equilibrium quantity available in the market due to government subsidization of EVs.

Figure-3 in the document attached illustrates the effect of an import tax on the domestic market for gas guzzlers(vehicles that create a relatively higher rate of gas emissions) in New Zealand. The demand curve for gas guzzlers or GGs is represented as D(GG) and the supply curve for GGs is denoted as S(GG)1. The initial equilibrium price and quantity of GGs in the market are indicated as P*(GG)1 and Q*(GG)1 respectively in figure-3. Now, as the tax is imposed on the imported GGs, the overall market supply of GGs decreases which is reflected by a leftward or upward shift of the supply curve of GGs from S(GG)1 to S(GG)2 which leads to an increase in the equilibrium price of GGs in the market from P*(GG)1 to P*(GG)2 and a decline in the equilibrium quantity of GGs in the market from Q*(GG)1 to Q*(GG)2 in figure-3. The import tax amount, in this case, is NZ$3000 per GG or vehicle. From the standpoint of economic welfare, observe in figure-3 that the initial consumer equilibrium prior to the import tax imposition has been indicated by the area A+B+C+D and the post-tax imposition consumer surplus is represented by area A which signifies an overall loss in consumer surplus in the market or society by the area B+C+D. The initial procurer surplus before the tax imposition is denoted by the area E+F which eventually becomes area B after the tax imposition. The overall loss or waste to the society or the deadweight loss is represented by the area C+D in GG market in New Zealand due to import tax imposition.

Now, in the GG market in New Zealand, the imposition of import tax has basically reduced the overall or general supply of GGs in the market thereby leading to an increase in the market price of these vehicles and reduced operational quantity in the market. As indicated by figure-3, it has reduced the overall consumer surplus in the GG market and generated a deadweight loss in the society which is a complete or absolute financial loss or waste to the society as a whole. Now, an eventual increase in the market price of GGs would also lead to a reduction in the quantity demanded of these vehicles which will negatively affect the revenue of the producers or sellers and the producer surplus in the market. However, as an advantage of the import tax imposition, it can expectedly induce higher consumer demand for alternative and more energy and fuel-efficient vehicles or automobiles such as EVs in this particular instance which can further enhance the overall atmospheric or environmental quality and contribute to the reduction or mitigation of global warming. Hence, considering the environmental perspective, government intervention in the market for imported vehicles might seem justifiable but however, it can be reconsidered based on its welfare impact on society or in the domestic market for gas guzzlers.