The car of the future?

Market failure occurs when the free market fails to deliver an efficient allocation of resources. Pollution by cars is a prime example of a negative externality or an external cost. We pay road tax and face high tax rates on petrol, but another form of government intervention is due to come into effect. From the 1st January 2011, nine models of electric car will be eligible for grants of up to £5000 (although only three models will be immediately available). By subsidising certain electric cars, the government is aiming to give people an incentive to switch to these so-called more environmentally friendly cars, as they will now be cheaper.

There are concerns, however, that generating the electricity to charge these cars still emits carbon dioxide. The Transport Secretary, Philip Hammond, said:

There’s no point in switching the car fleet to running on electricity if the electricity emits vast amounts of carbon dioxide.

So is the electric car the car of the future?

Nine electric cars will be eligible for subsidies BBC News (14/120/10)
Cash grants for environmentally friendly cars announced Telegraph (14/12/10)
£850,000 to kickstart use of electric cars in NI BBC News (14/12/10)
UK names nine electric cars eligible for subsidy Reuters (14/20/10)


  1. What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be.
  2. Why is pollution an example of a market failure? Illustrate this on a diagram.
  3. Why could electric cars also be an example of a market failure? Illustrate this on a diagram.
  4. How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them?
  5. Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively?
  6. Why is there such a high demand for car usage?