Incentives Drive Electric Car Adoption

Gal Raz ,

In the quest to put more electric vehicles on the road, the United States government has provided incentives, both in the form of rebates for consumers and subsidies for manufacturers; consumers have enjoyed a $7,500 tax credit, and manufacturers have benefited from billions of dollars invested to expand capacity to manufacture the vehicles and recycle their lithium batteries.

Manufacturers are affected by consumer rebates indirectly, as the rebates either increase demand at the already set price or allow manufacturers to increase the price without losing sales. As for government subsidies, they reduce manufacturer costs directly.

Just as automakers have to address the issue of how to anticipate supply and demand — what resources to devote to production, and how to price the cars — the government must anticipate how it’s affected by the responses on both sides, from consumers and automakers. What’s the ideal combination of incentives? Subsidies alone could mean too much risk in overproduction, and a negative subsidy, or tax, would be politically difficult to execute.

Read more about the optimal approach to incentivize consumers and manufacturers in Darden Professor Gal Raz and Queen’s School of Business Professor Anton Ovchinnikov’s article “Tweaking Incentives Could Aid the Adoption of Electric Vehicles,” in the Darden School of Business/Washington Post “Case in Point” series.