Back in August 2021 all of my posts were on economic topics, building up to, or dealing with the implications of, this central thesis: “broad-based demand-side subsidies tend to cause the price of the subsidized commodity to increase.” The ensuing posts applied this principle to healthcare, higher education, and housing.
As part of the push to eliminate reliance upon fossil fuels, many have been urging the use of electric vehicles. (This post is not about whether that is a good idea.) One problem is that electric cars tend to be more expensive that gasoline-powered cars. The knee-jerk reaction is of course a government subsidy program, in this case a provision of the Inflation Reduction Act which grants a tax credit of up to $7500 for the purchase of an electric vehicle.
Last weekend the online version of ABC News reported “Tesla has raised prices on its Model Y in the U.S., apparently due to rising demand and changes in U.S. government rules that make more versions of the small SUV eligible for tax credits.” Utterly predictable.
One caveat here. apparently there is a price limit for vehicles to be eligible for the [full] credit, so there may be an incentive for manufacturers to rein in prices. Such features are necessary if a subsidy scheme is truly going to put the subsidized commodity into the hands of people who cannot (or choose not) to pay for it completely on their own.
Jay Bohn
February 9, 2023