Essay 7 - y microeconomic consequences of consumers shifting from vehicles powered by fuel obtained from oil to electric‑powered vehicles

ICE (what it means)

Internal Combustion Engine — petrol/diesel cars (the “traditional” cars).

Definitions — micro consequences & XED

Micro consequences = effects on prices, quantities, profits, consumer/producer surplus, efficiency, externalities. XED: EVs and ICE are substitutes (XED > 0) — EVs relatively cheaper → DEV↑, DICE↓.

Point 1 — Main claim

EV use has positive external benefits (cleaner air, less noise) ⇒ MSB > MPB; market under-consumes EVs at Qm.

Point 1 — Chain (what happens)

DEV shifts right; QEV↑ (SR supply inelastic → P_EV may rise; LR supply more elastic → P stabilises/falls); derived demand for chargers/electricity/batteries rises; consumer & producer surplus rise; scope for dynamic efficiency.

Point 1 — Context (built-in)

Clean-air rules (e.g., ULEZ) make ICE use less attractive; rapid public-charger rollout reduces range/time costs → higher EV take-up.

Point 1 — Diagram to describe

Positive externality of consumption (EVs): axes P–Q; draw MPB (=D) and MSB above MPB; mark **Qm < Q; say *policy/investment* moves Q **towards Q; *welfare gain* is area between MSB & MPB from Qm→Q*.

Point 1 — Evaluation (one line)

If chargers are scarce or the grid is carbon-intensive, take-up and external benefits are smaller in the SR; gains rise as infrastructure expands and the grid decarbonises.

Point 2 — Main claim

EVs and ICE are substitutes (XED > 0) ⇒ DICE shifts left → PICE↓, Q_ICE↓, profits & producer surplus for ICE firms shrink.

Point 2 — Chain (what happens)

For a representative ICE firm, AR (=D) shifts left; with AC unchanged, profit falls (or loss if AR < AC); derived demand for petrol/engine/exhaust/servicing falls; risk of x-inefficiency as incumbents contract.

Point 2 — Diagram to describe

ICE firm cost–revenue: draw AR (=D), MR, AC (MC optional); show initial profit rectangle at Q₀; then shift AR/MR left to AR₁/MR₁ → smaller profit (or loss if AR₁ < AC).

Point 2 — Evaluation (one line)

If oil prices fall or EV purchase/electricity prices rise, XED may be < +1 (SR) → the drop in ICE demand and profit squeeze are smaller than expected initially.

Final judgement (one-sided)

Net micro effects are positive (LR): EV demand and complements expand; consumer/producer surplus↑; negative external costs↓; ICE losses and fuel-duty issues are transitional as EV supply becomes more elastic and dynamic efficiency improves products.

Improve the judgement

“I’d add estimates of XED (EV vs ICE) and PED for car purchases in my market; higher elasticities would imply faster switching and larger effects, while lower elasticities would mean a slower, smaller change.”