The Impact of Government Price-proportional Subsidy Policies on Electric Vehicle Market Dynamics and Social Welfare

While considerable research has analyzed the impact of subsidies on electric vehicle (EV) adoption, the effects of price-proportional subsidy structures on market dynamics and social welfare have been less thoroughly examined. To address this gap, we develop a stylized game-theoretic model to investigate the competition between two EV manufacturers with consumers who have varying price sensitivities. Our research specifically focuses on the impact of fixed and price-proportional subsidy schemes on EV market size and the competitive dynamics between manufacturers. Our results reveal that excessive subsidies do not always lead to beneficial outcomes, particularly in uncovered markets, where not all consumers choose to purchase EVs. Additionally, we demonstrate that price-proportional subsidy policies, which are commonly adopted in many countries, are ineffective in maximizing social welfare in these uncovered markets. Furthermore, compared to uncovered markets, we find that in covered markets, different subsidy strategies can be employed to enhance both market efficiency and social welfare. These findings provide valuable guidance for policymakers aiming to design more effective and targeted subsidy policies for varying market conditions.