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Andy Wang

Suggestions for Different Categories of Economies

Published on 02/23/22


1. Small Developed Economies (e.g. Singapore, Norway, Luxembourg, Netherlands)

For small developed economies characterized by no car manufacturing, a combination of the Pigouvian tax and public investment is optimal. Since small developed economies generally lack economies of scale for manufacturing EVs, it is more economically efficient to import EVs from other countries with a comparative advantage in car manufacturing, leading to Pareto improvement with both sides of the trade benefiting. Pigouvian taxation could be implemented as an efficient mechanism to correct market failure while raising revenue for the government. In addition, as a small economy, the costs of investing in public infrastructure - in building charging stations, for example - are significantly less than those in a large economy, and the investments in such public infrastructures generally yield greater returns, hence being more cost-effective. When implemented together, the combination of the two policies could lead to a balanced budget, providing an effective solution to market failure without hampering economic growth.


2. Large Developed Economies (e.g. USA, China, Japan, Germany)

For large developed economies, a combination of Pigouvian tax and subsidy is preferable. Unlike small developed economies, large developed economies generally have greater potential to grow their domestic car manufacturing industry and develop a comparative advantage in the global market. Thus, it is advisable to subsidize its domestic EV industry, which utilizes the high potential of economies of scale. Through subsidizing production, economic growth is achieved from both an increase in production and exports. Pigouvian taxation could also be implemented as it could efficiently correct the market failure and raise revenue for the government, which could be used for subsidies. While the government could also engage in public investment in infrastructures such as building charging stations, it is relatively less cost-effective and may lead to economic inefficiency. However, as an economy that has strong domestic demand and production of EVs, privatization of building charging stations could lead to a more economically efficient outcome because the market for charging stations does not have significant externalities. Therefore, this policy mix could provide an effective solution to market failure while promoting economic expansion by developing a comparative advantage in the EV industry.


3. Developing Economies (e.g. Mexico, Thailand, Indonesia, Comoros)

With issues such as technological backwardness, high unemployment, and lack of modern infrastructure, developing economies cannot spend a substantial amount of the government budget on supporting an entirely new industry. At the same time, a tax on carbon emissions may not be the best choice as alternative energy sources are limited and most manufacturing goods may heavily rely on fossil fuels. Governments of developing economies should subsidize R&D programs for green energy sources and follow the global trend of switching to EVs. R&D is a key driver of economic growth as it spurs innovation and development. Developing economies can start by encouraging the private sector to engage in innovations towards green energy so that they will not be left behind by the global economy. Such spending can be capital-intensive, but it is critical to encourage breakthroughs that can bring profits and consumer well-being.

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