Question

1. To promote cleaner air, the federal government in the United States enacted tax incentives for purchasing new electric vehicles or clean-fuel vehicles. These were scheduled to be phased out over time.

a.         Graphically illustrate the intended effect of this tax incentive, and explain the expected outcome of phasing it out. (Assume there is no production externality.)

b.         An alternative approach is to raise taxes on gasoline and other fuels. What is the economic intuition of this policy?

Answer 1

(9.) The impact of giving tax incentives ou the purchase of evehicles will increase the demand for e vehicles in the shat un. (which has been shown by a rightwand shift). Consumer would be willing to purchase mou with the given income. But in long un, if the policy of tay incentives is pleased out, it will tend to decrease demand negligibly as the consumers would build lo pectatious that it thad to be phased out by govt-d better to take advantage of policy now. Son in long run, the demand won't change much even the incentives au Phased out Price $ - supply - - - Demand after tas incentive -Demand Evelines Scanned with CamScanner

Producers would compete in long uen as to lower their cost of a peduction a supplying e vehicles at the same pece. (6) The alternative appeach to raise tays ou gasoline & other fulls will have a positive impad ou the demand of e veludes only if the demand for relides is quite elastic re any change in prices of deisel deiven a petuel velices can incentivize tousuwer to shift to e-vehicles This is also referred to as loss-price elasticity. This policy in shat un may not help because there exists a strong taste of consumes towards petol duwen vericles & may not increase then demand instantly But in long run, it can help in shifting their preferences towards e-veluiles segment. The economic intution is only to increase the cost of substitute good as to increase our own Product's demand. But that depends upon relative price . elasticities of demand in both indust- - les Cs Scanned with CamScanner