Hybrids and the Problem with Subsidies

In a beginning microeconomics class, you would learn that if a product produces a positive externality, then a subsidy would produce a more socially efficient level of output for that product. For example, automobiles pollute but hybrid automobiles pollute less than regular automobiles, so a subsidy should help reduce pollution. This was the thinking behind the decision in 2000 to let hybrid cars use the HOV (high occupancy vehicle) lanes in Northern Virginia. The Virginia legislature decided to see if a one-year exemption for hybrids on the HOV lanes would encourage people to buy these new automobiles. Every year, the legislature has renewed the exemption.

Fast-forward to 2005 and we see that the legislature has inadvertently created a real dilemma for itself. The hybrids are multiplying like rabbits in the HOV lanes and these lanes are becoming congested. In the six months from March 2004 to October 2004, the number of hybrids using the HOV lanes each day has climbed from 480 to 1700. Six months later, and there must be over 3000 of them now.

In July, the hybrid exemption for the HOV lanes is due to expire. Considering the problems that the exemption is causing, it would be madness for the legislature to renew it. However, the legislature cannot so easily slay the monster they created. Thousands of people have bought hybrids at a premium of $4000 or more over regular cars in the hope of buying their way into the HOV lanes. Taking away a goody is hard for legislatures to do. Think about farm subsidies. Once you start subsidizing, you create a natural lobby that will work to perpetuate this subsidy, even when the economic justification is no longer valid.

This Washington Post article explains the situation in Northern Virginia:

According to the Electric Drive Transportation Association, the Washington area ranks with California as the country's leading markets for hybrids.

Several car dealers in Northern Virginia said it's because of the HOV exemption. "I'd say 95 percent of the people who buy a Prius say it's to get into HOV," said Jay Taye, sales manager at Ourisman Fairfax Toyota. "They talk about the tax break and the HOV, and once in a while they say they prefer it for the gas mileage as well."

It isn’t at all clear that the hybrid exemption has really helped air quality in Northern Virginia. Hybrids do pollute less than ordinary automobiles but the exemption has increased the number of single occupancy vehicles. An ordinary car with three occupants pollutes a whole lot less per person than a hybrid with one occupant. Also, if some of the new hybrid drivers were formerly metro riders or bus riders, then the switch to driving a hybrid would increase pollution. Also, the new SUV hybrids are not very fuel efficient; they're the equivalent of a diet soda with your candy bar.

An economist would tell you the optimal way of dealing with the problem of air pollution. Pollution is roughly proportional to the amount of fuel burned. Simply place a tax on gasoline, maybe 20 cents per gallon, and the pollution externality will disappear. Since hybrids burn less gasoline, they receive a subsidy in effect.

“But isn’t there already a 20 cent per gallon gasoline tax?” Yes

“So why do we need another subsidy for hybrids?”

I have no idea.

Update:

The Virginia Department of Transportation announce that it would build High Occupancy or Toll (HOT) lanes along the Beltway (I-495) between Georgetown Pike and Springfield. I comment about it here.