The problem of externalities in motoring

One of the facts of transport  is that cars cause negative externalities. Specifically congestion and carbon (and other) emissions.

One solution is to reduce the negative externalities by subsidising alternatives that create fewer problems. This principle has now been applied to electric vans. The government are to subsidise up to £8000 of the cost of an electric hybrid vehicle. This will result in a reduction in carbon fuel use and so less pollution.

The subsidy, which can cover 20% of the price of the van, is badly needed. A Ford Transit van costs £18000 in the diesel version, but £32000 in the electric version. This is a major obstacle to sales despite the lower running costs of the electric vans.

So with such a hefty subsidy there is there bound to be a big take up? Sadly not. A similar scheme was announced for cars. Under  that scheme 1,052 cars were sold in 2011, using up just £5.26m of the original £250m budget.

The problem is that the  demand for these cars and vans is highly inelastic. A very large price reduction is required to promote a significant rise in demand. You should consider what the factors are that determine that inelastic response.

One of the things we have learnt in transport policy is that complementary measures are needed to provide support for policies that aim at changing the mode of transport. This policy is just one of the many such policies.

The BBC cover the story here