The Economics of Electric Vehicles

We examine the private and public economics of electric vehicles (EVs) and discuss when market forces can be expected to produce the optimal path of EV adoption. Privately, consumer cost savings from EVs vary. Some experience net benefits from choosing gasoline cars, even after accounting for EV subsidies. Publicly, we survey the literature documenting the external costs and benefits of EVs and highlight several themes for optimal policy design. These include (1) promoting regional variation in EV policies that align private incentives with social benefits, (2) pursuing a time-path of policies that reflects changing marginal benefits, and (3) rationalizing electricity and gasoline prices to reflect their social marginal cost. On the one hand, research suggests optimal policy be front-loaded and then ramp down over time as industries gain experience in EV production and as charging infrastructure is put in place. On the other hand, as electricity generation becomes cleaner over time, environmental considerations may favor increasing subsidies as the environmental benefits of driving EVs rise relative to conventional vehicles.