Subsidies as a Government Intervention

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Subsidies
Subsidies Introduction             General Motors is working towards becoming profitable on electric vehicles sold in North America by 2025 (Colias). This can be partly attributed to new federal subsidies provided as part of the US climate legislation.  Economic Concepts             The key concept will be intervention. In particular, the focus will be on subsidies as a government intervention. Through subsidies, the government can reduce suppliers’ production costs and encourage them to increase their output. Diagram Explanation             As shown in Figure 1 below, this is a normal market where the forces of supply and demand determine the price and quantity purchased. There are no subsidies in the market, hence the normal forces of the market are determining the price of the electric cars and the quantity of consumer purchases. In this case, GM has not received any subsidies from the government to produce its electric vehicles. The graph shows the number of cars sold versus the price. The diagram has the supply and demand curves, which meet at points P1 and Q1.   Figure 1   However, in Figure 2 below, the government intervened to provide GM with a subsidy. Because of the subsidy, the company will reduce its operating costs. The government’s subsidy to GM is meant to increase its US battery-making facilities and make revisions to the electric vehicle tax credits for consumers, which is expected to boost margins in the coming years. Because of the subsidy, GM will reduce its expenses, allowing it to sell its electric vehicles at a lower price, P2. The supply will shift from S1 to S2. The decrease in prices will increase the quantity supplied from Q1 to Q2. GM can sell more electric vehicle units because of the government subsidy.   Figure 2             When a government introduces subsidies, it seeks to enable a business to produce goods at a relatively lower cost. Ideally, it would be costly to produce such products without subsidies because of the initial cost involved. However, when the government offers manufacturer subsidies, such a manufacturer can produce more cost-effectively. Hence, the business can sell its products at relatively lower prices because of the lower production costs. Hence, subsidies allow a business to reduce its prices and make its products more competitive in the market. Such a business can produce the product at a price that clients can afford. In the case of GM’s electric cars, the company will incur large costs shifting from producing oil-engine cars to electric ones. Given that the US government is committed to fighting climate change, investing in electric gases will be a major step towards protecting the environment against greenhouse gas emissions (Gross, 2020). The government understands that large car manufacture...