Optimal electric vehicle subsidy and pricing decisions with consideration of EV anxiety and EV preference in green and non-green consumers

Abstract

Electric vehicles (EVs) are an important part of the solution to climate change due to their reduction in carbon emissions. Purchase subsidies have been efficient tools in overcoming the cost barrier. In this paper, we formulate an analytical model to study the impact of EV anxiety and EVs’ environmental benefits on optimal subsidy and pricing decisions. We consider a market consisting of a vehicle manufacturer, a social planner and two segments of consumers: green and non-green. Both segments have EV anxiety. The manufacturer produces and sells both EVs and traditional vehicles. EV purchase decisions are influenced by consumers’ EV anxiety, preference for EVs, EV subsidy amounts, and retail prices for both EVs and traditional vehicles. Our results justify the necessity of a subsidy program in promoting EV sales. We identify the optimal subsidy under various market conditions. We further analyze how environmental benefit and consumers’ EV anxiety impact the optimal subsidy decisions. We find that it is optimal to offer the maximum level of subsidy when the environmental benefit is above a certain threshold value. Our results also show that the optimal subsidy either decreases or increases in consumers’ EV anxiety, depending on the level of environmental benefit of EVs. In addition, we show that EV anxiety has both positive and negative effects on the demand for EVs, but overall harms EV adoption.