Germany to provide 1 billion Euro subsidy on electric vehicles



Electric vehicles are merit goods as the consumption of electric vehicles benefit third parties. This also means there are positive externalities of consumption. However electric vehicles are under-consumed in Germany resulting in market failure and under-allocation of resources. This subsidy aims to correct the market failure through a subsidy which is a market based policy that lowers production costs for producers and the price paid by consumers. Through a subsidy the market failure can be corrected.

However a subsidy does have certain negatives impacts. Subsidies come from tax revenues which are paid by the general public. However, not everyone will benefit from these subsidies therefore it is not necessarily fair. In addition, subsidies come with opportunity cost, the government revenue spent on subsidies could, perhaps, be better spent elsewhere.

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