Let us assume that all consumers are eligible for this subsidy. Suppose (inverse) demand for electric...

 

Transcribed Image Text:

Let us assume that all consumers are eligible for this subsidy. Suppose (inverse) demand for electric vehicles (EVs) is given by 80, 000-.05QEV+0.5PICE, where QEV is the quantity of EVs and PICE is the price of internal combustion engines. The inverse demand for internal-combustion-engine (ICE) vehicles is 60,000-.02QICE +0.5PEV, where QICE is the quantity of ICES and PEV is the price of EVs. Both types of vehicles are sold in a perfectly competitive market. The marginal cost of producing EVs is 40,000. The marginal cost of producing ICES is 20,000. Given typical driving patterns and the typical source of electricity for charging EVs, the (present- discounted) marginal external cost of each EV is 5,000. And likewise, the (present discounted) marginal external cost of each ICE is is 10,000. 1. (2 points) Do these demand equations characterize EVs and ICES as substitutes or complements? How do you know? 2. (4 points) If there is no policy, what are the quantities sold of each type of vehicle? 3. (4 points) If the optimal Pigouvian tax is imposed on each type of car, what quantities are sold? 4. (4 points) The optimal Pigouvian prescription cannot be implemented. Instead, the government offers a subsidy for the EV equal to the difference in marginal external damage between the EV and the ICE, i.e., $5,000. What quantities are sold of EVs and ICES? 5. (4 points) Does this obtain the efficient level of car sales? Is there too much or too little pollution in the car market relative to the socially efficient level? Let us assume that all consumers are eligible for this subsidy. Suppose (inverse) demand for electric vehicles (EVs) is given by 80, 000-.05QEV+0.5PICE, where QEV is the quantity of EVs and PICE is the price of internal combustion engines. The inverse demand for internal-combustion-engine (ICE) vehicles is 60,000-.02QICE +0.5PEV, where QICE is the quantity of ICES and PEV is the price of EVs. Both types of vehicles are sold in a perfectly competitive market. The marginal cost of producing EVs is 40,000. The marginal cost of producing ICES is 20,000. Given typical driving patterns and the typical source of electricity for charging EVs, the (present- discounted) marginal external cost of each EV is 5,000. And likewise, the (present discounted) marginal external cost of each ICE is is 10,000. 1. (2 points) Do these demand equations characterize EVs and ICES as substitutes or complements? How do you know? 2. (4 points) If there is no policy, what are the quantities sold of each type of vehicle? 3. (4 points) If the optimal Pigouvian tax is imposed on each type of car, what quantities are sold? 4. (4 points) The optimal Pigouvian prescription cannot be implemented. Instead, the government offers a subsidy for the EV equal to the difference in marginal external damage between the EV and the ICE, i.e., $5,000. What quantities are sold of EVs and ICES? 5. (4 points) Does this obtain the efficient level of car sales? Is there too much or too little pollution in the car market relative to the socially efficient level?

Answer rating: 100% (QA)

Electric Vehicles EVs and Internal Combustion Engine ICE Vehicles A Market Analysis 1 Substitutes or Complements These demand equations characterize EVs and ICEs as substitutes Heres why The price of ... View the full answer