Couple of my colleagues at work were assessing the problem that what is the elasticity of demand for owning a car? Would changes in price or the tax affect the demand for personal motoring?
Let us think of a scenario. Electric cars (which consumption or driving itself produce 0 emissions) make their way to the market, the vehicle tax as Pigouvian tax isn´t anymore justifiable. The two options are either to lobby to keep the vehicle tax by reformatting it as a property tax, or remove the vehicle tax entirely. In this blog we are going to take a deeper look to the second scenario.
Removing the tax would presumably decrease the price of the car usage and it should thus increase demand for the cars. But how much?
I would say that the demand for cars and personal motoring is relatively inelastic. Usually the people who consider buying a car are in a situation where they think that there already exists a personal demand for a car. After that, the consumer decides to go to a dealership and find a suitable car for a good price. The point in this is that demand might be more reliable on other factors than price: Family size, location and distances, status etc. For example, if you think that you don´t need a car and the government says that now owning a car is cheaper due to tax cuts, would you be more willing to buy a car? You still would probably be indifferent.
Also the price of the substitute, public transportation, doesn´t have a considerable effect for the demand of personal motoring. Even though in major European cities public transportation has proven to be cheaper, faster and more ecological, still these cities have insane traffic jams from personal motoring.
People make their buying decision more with other factors that the cost of owning a car. That´s why I would say that the demand for cars is relatively inelastic.
One interesting point is that car sharing and "mobility services" have become more and more popular. Instead of buying an own car, people are buying a service that a car provides; getting from point A to point B. This already suggests that maybe car owners are buying the car for this exact reason.
So back to the starting point: If vehicle tax would be eliminated, the demand for cars wouldn´t change significantly. People are still demanding the service that owning a car provides. Larger societal changes would be required at this point to increase significantly demand for personal motoring. People are already finding the substitutes more lucrative than before, especially in large metropolises.
Conclusion is that electric car or not, fiscal policies might not be as effective in controlling the demand of personal motoring than it is for controlling the negative externalities of road traffic. The trend for the decreasing demand of owning a car might be stronger than any price effects on personal motoring. There are more other factors driving the consumer into decision-making than the price.
Text: SW
