Electric vehicle policy dilemma

What is it about?

Promoting the adoption of electric vehicles (EVs) through evolving government policies involves complex strategic interactions with stakeholders like manufacturers, consumers, and the government. Our study compares two models when the government either maximizes social welfare or minimizes costs, given an exogenous EV adoption target. Assuming a single manufacturer for EVs and gasoline vehicles (GVs), we mainly focus on government policies. We find that, regardless of type, the government prefers combining consumer subsidies and investment in charging infrastructure. We also establish that consumer subsidy, EV price, and optimal level of charging infrastructure for a social welfare-maximizing government are higher whenever the target adoption level for a cost-minimizing government is below a threshold. Further, government and private investments in charging infrastructure complement each other rather than crowding each other out. We study the robustness of our findings by considering EV drivers’ range anxiety, duopoly, and external consumer nudge.

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Why is it important?

This implies that the social welfare-maximizing states are likely to perform better than states facing budgetary constraints. However, states without budgetary constraints and those who choose a high EV adoption target are likely to perform better than welfare-maximizing states. Our study offers several policy insights. First, we identify a threshold adoption level at which the policy choices of social welfare–maximizing and cost-minimizing governments diverge, informing when each policy regime is more appropriate. Second, we show that public and private charging infrastructure investments are strategic complements, implying that government investment can stimulate rather than crowd out private deployment. Third, we find that when infrastructure subsidies generate a behavioral (signaling) effect on consumers, the government may optimally include charging station subsidies in its policy mix, irrespective of its objective.