The Chevy Volt

The video is of a test drive of the Volt in which the reviewer comments on the quality and price of the Volt.

The Chevy Volt is an interesting vehicle that makes use of new technology.  It uses a lithium-ion battery which holds more charge and is heavier and pricier than the nickel-metal hydride battery pack used in the Toyota Prius and similar hybrid vehicles.  The back up to the Volt is an electric motor that is powered by a gasoline electric generator.  A fully depleted battery takes eight hours to from a 120 volt outlet or three hours from a 240 VAC outlet.
The Volt will sell for approximately $42,000 but with $7,500 federal tax credit that will reduce the cost for most buyers to $34,500.  The EPA gives the Volt a combined gasoline/electric fuel economy of 60 mpg, or about twice the mileage of a similarly sized car.  Assuming that a typical Volt owner will drive 15,000 miles per year, and that gasoline costs $4.00 per gallon, the Volt will save its owner approximately $1,000 per year in fuel expenses.  If a traditional subcompact costs $20,000, the Volt will have a fourteen year payback period for the owner and a twenty-one year payback period for society due to the tax credit.The graph of the “Market for the Chevy Volt” provides some important economic details of the Volt market and the impact of the federal tax credit subsidy.  A lot of guess work went into the shape of the supply and demand curves, but the guess work does not affect the direction of movements of prices, only the size of the movements.  The supply (S) and original demand curve (DO) represent the market for the Volt prior to the federal tax credit subsidy.  At equilibrium on the supply and original demand, 34,667 cars sell for a price of $40,333.

With the subsidy, the demand expands (DN).  The new equilibrium quantity increases by 5,000 Volts to 39,667 and equilibrium price increases to $42,833.  The subsidy is shared by Chevrolet and the buyer.  Chevrolet charges $2,500 more per car (The difference between the new equilibrium price and the original equilibrium price), and after the subsidy, the consumer pays $5,000 less (The new equilibrium price less $7,500.  The price paid by consumers is shown on the graph at the point where the dashed line showing the new equilibrium quantity crosses the original demand curve and then moving horizontally to the price axes).

The private market has a new partner, the taxpayer.  The yellow rectangle is the subsidy paid by taxpayers.  It is $297.5 million dollars ($7,500 times 39,667 Volts).  The government estimates that approximately one third of buyers will not qualify for the subsidy, reducing the taxpayer’s bill to approximately $200 million, or approximately $40,000 per additional Volt sold.  To benefit society, the sale of Volts must generate sizeable positive externalities, reduction in pollution, etc.  Does the subsidy benefit taxpayers?