Bo Goodrich

Xuetao Shi
Economics 200 BA
13 November 2015
Article Title: Norway is a Model for Encouraging Electric Car Sales
Source: http://www.nytimes.com/2015/10/17/business/international/norway-is-global-model-forencouraging-sales-of-electric-cars.html?_r=0
Article Summary:
Norway is providing generous subsidies on the purchase of electric cars, which are generally
more expensive but cleaner to run than their carbon burning counterparts, encouraging their sales
to reduce the nations carbon emissions to UN set standards meant to curb the progression of
climate change. These subsidies include exemptions from a 25% sales tax, a registration tax that
averages $12,000, as well as tolls and parking fees. As an example, if one were to buy an electric
Volkswagen Golf in Norway it would cost, $31,000, while a dirty polluting diesel (as we have
recently learned in their emissions scandal) Golf would cost, $40,000. Norways subsidies have
essentially made it cheaper to buy the car that is better for the environment than the one that is
bad for the environment. The subsidies have been extremely successful in increasing electric
vehicle sales, which constitute the largest share (2%) that electric cars have in any national
market and exceeding their goal of having 50,000 electric cars on the road by the end of 2017
this April. These subsidies have raised great debate over their efficiency in reducing carbon
emissions, argued to only have an impact of 0.1% reduction in carbon emissions at their
estimated cost of $13,000 per vehicle to the government per year of use. Until a value can be
established for the value of that reduction in carbon emissions, the debate will remain unsettled
as to whether this is an economically efficient solution to curbing climate change and carbon
emissions.
Economic Analysis:
Ceteris Paribus: The use and consumption of electric vehicles creates a positive externality in
that they provide transportation without creating carbon pollution that is damaging to health and
the environment (especially in a country like Norway that produces nearly all of its electricity
from hydropower). However, because this excess social benefit is not taken into account in the
private benefit (shown by Demand Curve 1) a consumer considers when purchasing an electric
car, the market equilibrium is under allocated and is inefficient (shown at Pmarket and Qmarket,
where the marginal social benefit of the last unit sold is actually greater than the marginal cost).
The Government of Norway institutes a Pigovian Subsidy of the amount of the positive
externality (distance of the shift up in demand curves) in order to bring the social benefit into the
private marginal benefit the consumer considers in making the decision to buy their car (as now
shown by Demand Curve 2). As the consumer now considers both the personal and social benefit
in their decisions, consumption increases to the truly efficient allocation (where the marginal cost
is equal to the marginal social and private benefit combined in the last unit sold).