Application Exercise 3j: Electric Vehicle Incentive 2025-2028
- Describe how providing a rebate can incentivise businesses to behave in specific ways. Use the DRIVEN Charger Rebate Stream to illustrate.
A rebate is a financial incentive provided by the government that reduces the effective cost of an investment or activity. By lowering costs, it increases the expected profitability of engaging in that activity. In the case of the DRIVEN Charger Rebate Stream, the Victorian Government is subsidising the installation of EV chargers by offering up to $3,000 per charger (up to $20,000 per site). This reduces the cost faced by dealerships and repairers. As a result, businesses are more likely to install EV chargers because their initial investment cost falls, expected returns increase and the risk associated with transitioning to EV servicing decreases. This means that the rebate incentivises automotive businesses to transition toward EV-related infrastructure.
- Describe the economic relationship between ‘charging stations’ and ‘EVs’.
Charging stations and EVs are complementary goods given that they are consumed together, where an increase in the availability or demand for one increases the demand for the other. As the number of charging stations increases, EVs become more convenient and practical to own, which increases the demand for EVs. Similarly, an increase in EV ownership increases the demand for charging infrastructure.
3. Demand and supply diagram
4. The DRIVEN Charger Rebate increases the availability of charging infrastructure. Since charging stations are complements of EVs, this increases demand for EVs and shifts the demand curve from D1 to D2. This results in an increase in both the equilibrium price (from P1 to P2) and the equilibrium quantity (from Q1 to Q2). Thus, the rebate results in greater EV uptake via the increased demand.
- Explain how the change in relative prices causes a reallocation of resources. Use the change in the market for EVs to illustrate.
As demand for EVs increases, the equilibrium price of EVs rises relative to internal combustion engine (ICE) vehicles. This higher relative price signals increased consumer preference for EVs, increases potential profits for EV producers and therefore attracts more resources (e.g. labour and capital) into EV production. At the same time, relatively lower demand for ICE vehicles exerts downward pressure on profitability in that market, leading to fewer resources being allocated to it and reallocation elsewhere. Accordingly, price signals in a market economy reallocate scarce resources toward EV production and away from traditional ICE vehicles.
- Explain how the government could introduce a consumer incentive to further accelerate the uptake of EVs.
The government could introduce a direct consumer subsidy or rebate for purchasing an EV, including initiatives such as a $10,000 rebate to EV buyers, a reduction of stamp duty or other government-imposed charges and/or providing tax credits. A consumer subsidy lowers the effective purchase price, increasing quantity demanded and resulting in a rightward shift of the demand curve for EVs. This accelerates the transition to EVs and supports emissions-reduction objectives, leading to a higher equilibrium price and quantity over time.
- Explain how the government could introduce a consumer disincentive to further accelerate the uptake of EVs.
The government could impose a tax or stringent regulations on ICE vehicles. This might include higher registration fees, increased fuel excise, or emissions-based taxes. These types of initiatives would increase the cost of driving these vehicles, reducing their demand. As ICE vehicles become relatively more expensive compared to EVs, consumers will, over time, substitute toward EVs. This change in relative prices encourages a reallocation of resources toward EV production and away from petrol vehicles.