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Brooks Wilson's Economics Blog: The Chevy Volt

Saturday, February 5, 2011

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?         

9 comments:

  1. Lori Hodges6/2/11 11:59 PM

    I don’t think tax payers will benefit from the subsidy. Unless you are one of the small percentage of the public who purchase one, you will receive nothing in return for these payments. Americans basically paid to preserve the jobs of union workers or rich business men and provided an appealing discount to the few buyers who find great satisfaction in going green to be worth the price of the car. A person in a position to buy a $40K car probably isn’t worried about gas mileage or gas prices. My opinion is that subsidies alter the value of products and baffle the marketplace. The ability of the consumer to assess value and make rational purchases, expressing their demands and allowing the distributed intelligence of the markets to allocate resources efficiently in response, is destroyed. Consumers do not see the opportunity costs of implementing political mandates on the economy. What could have been done with all the money used to provide subsidies and billions squeezed from us to produce those cars.

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  2. Danielle Richter7/2/11 8:32 PM

    I don't think that the subsidies benefits taxpayers for the fact of how much the car costs. If the cost of the cars would be less expensive more people would be willing to buy them, therefore resulting in benefiting from the subsidies. The people who are able to pay that much money for cars really do not care as much about receiving money back.

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  3. Pamela Nelson9/2/11 10:37 AM

    I agree with Danielle that if the cost of the cars would be less expensive, more people would be willing to buy them. However, as time progresses, the price will decrease, just like cell phones, gaming systems and personal computers. There was a time when all of these items were beyond the reach of a common citizen as well. So, I say, be patient. Someone has to be the guinea pig..might as well be the rich guy!

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  4. I agree Pamela! Even if I had money and even with the tax credit there is no way I would invest that kind of money on a brand new product. I will let all of the people that can afford to take a chance of losing money on it test it out before I even consider buying one. Yes, it does sound like a cool car and could save someone money in the long run but I think it would be smarter to wait until it has been on the market for awhile and has been tweaked.

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  5. Ken Haltom said...

    There are other problems here as well. One is the claim that the Volt is a positive for a cleaner environment. How much cleaner will the environment be? Most of the electricity generated in the country comes from coal burning power plants. Are we trading pollution from one kind of fossil fuel (gasoline) to another (coal)? Is that really worth a $7500 subsidy in an attempt to have a cleaner environment? Seems like unintended consequences once again in government policy.

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    Replies
    1. Less than 50% of our power generation portfolio is Coal and with an EV, 80% of the energy in the batteries goes to the wheels while only 15% to 20% of the energy in a gas tank of an ICE goes to the wheels, so even with Coal, we come out way ahead. Also, Wind tends to blow more in the off peak hours when an EV is charging.

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  6. Arielle Harris, UHS.....

    This car seems to be a good idea in that it helps reduce pollution, but it is quite expensive to the average American. I think it would be a great car for people who can afford it, but then again, for everyone else who are paying for the subsidy with their taxes, nothing is given in return. Only the few who can afford the car would be receiving something in return. After a while, though, when the car is tweaked and the price goes down, the law of demand will come into play because the quantity demanded will rise.

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  7. Hello there! Thank you for sharing your thoughts about Chevrolet in your area. I am glad to stop by your site and know more about Chevrolet in your area. Keep it up! This is a good read. You have such an interesting and informative page. I will be looking forward to visit your page again and for your other posts as well.
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  8. Marilyn Pippin
    I don't think the subsidy benefit pays to have a car at that expense. The only place I could see where this car might be in demand is up North where they have to plug in their batteries to keep them from freezing. I personally would not benefit from the subsidy benefit and would rather put my money into a home.

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