According to the article, the subsidy given by the Delhi government aims to promote Electric Vehicle to create positive externality. Subsidy is a benefit given to a business or an institution, usually by the government to reduce cost of production.
The subsidy will help reduce not only production costs for firms and manufacturing electric vehi- cles but also speed up the production levels in order to bring its supply in the market as soon as pos- sible, considering the rapidly rising pollution levels in Delhi which currently is a danger to the pub- lic.
Moreover the subsidy will also encourage the consumption of electric vehicles as it will be supplied at a lower price than what it would have been supplied for without the subsidy, making it even more affordable for the lower income groups. Therefore causing an extension in its demand due to the law which states the negative relation between price and quantity demanded , ceteris paribus.
The figure gives the data relating to the prices to be paid and received by the consumers and producers once the subsidy is provided.
In the figure, the initial price and quantity is P* and Q*, the subsidy results in an increase in supply, S1 to S-Subsidy. This results in a decrease in price to Pc (Price paid by consumers) and an increase in quantity produced to Qs, therefore shifting the equilib- rium. A vertical line up from the new equilibrium (Qs, Pc) up till the original supply curve repre- sents the subsidy per unit. Which leads to the price Pp received by the producers. The total subsidy paid by the government can be calculated by multiplying subsidy per unit (Pp - Pc) with the new
quantity Qs. Furthermore, a subsidy also raises both, the consumer and producer surplus.
Following the subsidy, the Delhi government will also have to ensure that these EV are being pur- chased and utilised by the citizens, which may require several persuasion methods to do so.
For eg -: The government may have to advertise the EV’s in order to spread awareness and there- fore encourage consumption.
Secondly looking at the critical pollution conditions in Delhi, the government may even have to make it a legal requirement to use such vehicles instead of combust engine vehicles as they will be required to switch to sustainable methods (Consumption & Production) as soon as possible (in order to protect their people’s health).
Moreover the government can also cut income taxes as a way of raising people’s disposable in- come, which will to encourage and motivate and make it more affordable for people to purchase EV’s.
Moreover, due to the subsidy -:
Consumers benefit due to a fall in the price of EV as well as a rise in quantity.
Producers too benefit as they receive a higher price and are also able to produce a larger quantity. The government suffers as the subsidy is a burden on their budget. To obtain the revenues for the subsidy, the government may have to reduce expenditures elsewhere in the economy, or it may have to raise taxes, or it may have to run a budget deficit (government expenditures greater than tax rev- enues). Whatever the case, the impact on the government’s budget is negative.
Workers will benefit as firms producing EV’s will be required to hire more workers to produce the extra output.
Society as a whole is worse off due to overallocation of resources to the production of EV’s , Qs > Q*.
Once the EV’s are in use they give rise to positive externalities, which produces spill over benefit for the society.
The figure along- side shows the positive externali- ty before the subsidy is grant- ed by the Delhi government for EV’s
The figure above helps us to understand how the consump- tion of EV’s creates external benefits for the rest of society. The marginal social benefit exceeds themarginal private benefit.
The figure along- side shows the positive externali- ty after the sub- sidy is granted by the Delhi gov- ernment for EV’s EB = External Benefits
Please note - The level and amount of subsidy is just an assumption, the actual level and amount may differ from the real value.
Whereas this figure shows us how a subsidy makes it possible to achieve the quantity desired to be produced and consumed. Making it cheaper for consumers and helping the producers to earn more. However the government places the burden of the subsidy upon itself as explained above (2nd page - explains more about this subsidy). Lastly it could possibly lead
to a welfare gain which helps benefit the entire society, signifying the subsidy is a success.
As a conclusion, such subsidies will help create environment for the people of Delhi. This will lead to sustainable development (Development that meets the needs of the present without compro- mising the ability of future generations to meet their own needs) in the long run.
For more information about the article please refer to the link below -:
https://economictimes.indiatimes.com/news/politics-and-nation/delhi-govt-to-provide-huge-subsi- dies-on-electric-vehicles-cm-arvind-kejriwal/videoshow/80688536.cms
