Introduction
Firm Characteristics (word count: 111)
In this essay, I will be using Xpeng to evaluate the role of government interventions in the market. XPENG is a Chinese company founded in 2014 specializing in creating, advancing, and fabricating electric automobiles that are now preferred in the current world. Xpeng, in this case, is renowned for producing innovative electric vehicles such as Xpeng G3 and Xpeng P7. These products have integrated cutting-edge technologies, including artificial intelligence (AI), autonomous driving, and connectivity, to provide astute transportation resolutions (Carey, 2023). Besides, XPENG operates within a fiercely competitive global electric vehicle (EV) industry landscape. This entity competes with established industry participants such as Tesla, BYD, NIO, General Motors, and Li Auto.
Market structure (word count: 147)
Within the electric vehicle sector, XPENG competes in a monopolistic competition market structure comprising many firms and differentiated products. In this industry, over 300 electric vehicle, manufacturers produce differentiated products in terms of battery life, price, features, and design.
In addition, Hu et al. (2021) believe that the electric vehicles industry in China has a relatively high price elasticity of demand mainly because the Chinese market is ever-changing. As the electric vehicles industry matures, more firms enter the market, giving consumers a wide range of options as prices become more competitive. Besides, Fridstrom and Osli (2020) state that China’s electric vehicles industry supply is inelastic in the short term due to production capacity constraints and labor market limitations. However, it would likely be elastic in the long term as the industry acquires new technology and enacts government policies that disrupt supply chains.
Analysis of the government Intervention (word count: 830)
2.1 In 2022, the Chinese government proposed a ban on the sale of fossil fuels by 2025 to reduceover-reliance on fossil fuels by its citizens and ppromotethe use of electric vehicles. In fact, Hainan Island in China announced the ban in September 2022. As a result, the sale of new cars that uses fossil fuels is affected, and the sale of electric vehicles is promoted. In specific, the sale of battery electric vehicles and plug-in hybrid electric vehicles (PHEVs) will be enhanced by the ban (CBS News, 2022). This complete ban on the sale of fuel-powered vehicles would have a significant impact on the automobile industry, including producers, suppliers, and consumers’ financial sustainability (Muehlegger and Rapson 2018).
2.2 The announced reasons for the proposed ban are to enhance energy independence, boost the adoption of sustainable transportation systems and promote innovation in technology, investment in sustainability research. Apart from the announced reasons, the other plausible reasons are reducing greenhouse gas emissions and boosting air quality (CBS News, 2022).
2.3 The planned ban will speed up China’s shift from non-renewable energy sources to sustainable alternatives like EVs. The government hopes to encourage the broad adoption and implementation of electric vehicles that run on renewable energy sources, thereby strengthening energy security and developing the growth of domestic renewable energy industries. Implementing the intervention would significantly impact the domestic automotive industry and its associated sectors (Dong & Zheng, 2022). The government aims to promote the expansion of electric vehicle production, supply chains, and charging infrastructure, thereby generating fresh job prospects.
2.4. China could plan to reduce reliance on foreign oil imports by changing to domestically generated renewable energy so as to provide power for electric vehicles (EVs). The ban on the sale of cars in China positively affects consumers and suppliers since, compared to conventional vehicles powered by internal combustion engines, electric vehicles often have reduced fuel and maintenance costs. Customers who switch to EVs powered by domestic renewable energy sources may save on fuel costs.
2.5 Effect of the Policy in Markets
Figure 1 Profits and prices before the ban
Figure 2: Prices and profits after the ban
As stated, this company operates in monopolistic competition, and in this market structure, the intersection between the marginal cost and marginal revenue curve decides the optimal units of electric cars. For instance, the optimal quantity of electric vehicles in Figure 1 is Q, and its price is P1, lying on the demand curve. Besides the yellow part in Figure 1 shows the profits earned. With the Chinese government enacting the ban on the sale of fossil cars in the market, there is an upward shift in the demand curve as consumers are more likely to demand more electric vehicles at affordable prices. Also, enacting the ban will shift the average and marginal costs downwards (AC1 to AC2 and MC1 to MC2). As a result, XPeng generates more revenue, showcased by an upward shift of marginal revenue (MR1 to MR2). Also, enacting the ban policy will shift the average and marginal costs downwards (AC1 to AC2 and MC1 to MC2). This is because the ban on combustion engine cars will increase the demand for electric vehicles, which will lead to increased production volumes, forcing Xpeng or companies in this market to spread their fixed costs over a large number of outputs.
Moreover, the company’s profits exceed the initial gain, as indicated by the yellow region in Figure 2. A shift from Q to Q1 implies a high price elasticity of demand, meaning that consumers are responsive to changes in price.
2.6 adopting this policy leads to an increase in demand which might strain the production ability and supply chain of Xpeng; this generally leads to delays and increases in prices in the long term (Nunes and Woodley, 2023). To address these issues in the long term, the government could implement alternative policies, such as subsidizing electric vehicle manufacturers and adopting emissions standards.
2.7 Apart from banning combustion engine cars, China government could enact these policies to achieve its goals.
- Provision of incentives and subsidies such as tax credits to the electric vehicles industry to encourage faster transition and increase demand.
- Building of charging infrastructure to make consumers’ transition to electric vehicles easier and more convenient.
Factors that might lead to the enactment of the combustion engine car ban over other policies include sending a signal to car producers to switch to electric vehicle production and the policy aligning with the country’s long-term sustainability goals.
2.8 The potential beneficiaries of the ban on combustion engine cars are electric vehicle manufacturers and the renewable energy industry. The electric vehicle manufacturers would likely benefit as it would increase the demand for electric vehicles, boosting their sales. Also, renewable energy producers would benefit greatly as there would be an increase in electricity demand due to the adoption of EVs in the market. However, combustion engine car manufacturers would be greatly disadvantaged as the ban will result in a decline in demand for combustion cars leading to low profitability.
Cross Comparison (Word Count:100)
A prior governmental intervention that pursued comparable objectives was the enforcement of emission standards and regulations for automobiles in China in 2016. The EPA was meant to be responsible for establishing vehicle emission standards under the Clean Air Act. The emission standards and fuel car ban policy share the common goal of reducing emissions and promoting environmentally friendly transportation (Wang et al., 2022). However, in the long-term, the ban on combustion engines is expected to have a significant and aggressive stance on the shift towards sustainable transportation compared to emissions standard, which only focuses on improving the combustion cars’ emission performances.
Critical Reflection (Word Count: 103)
This essay assesses the effects of the Chinese government’s prohibition of fossil fuel sales on the electric vehicle industry, focusing on Xpeng. This approach exhibits both advantages and disadvantages in practical applications. A key benefit is its ability to facilitate an understanding of market interventions by assessing desired outcomes and strategies for achieving them. One disadvantage of this approach is its heavy reliance on the price elasticity of demand and supply, which may exhibit variability in specific contexts or applications. Market competition, consumer behavior, and technological advancements are additional factors that can impact the price elasticity of demand and supply beyond government interventions.
Reference
Carey, J., 2023. The other benefit of electric vehicles. Proceedings of the National Academy of Sciences, 120(3), p.e2220923120.
CBS News 2202. Chinese province plans to ban the sale of gasoline-powered cars, Google. Available at: https://www.google.com/amp/s/www.cbsnews.com/amp/news/chinese-province-plans-to-ban-the-sale-of-gasoline-powered-cars/ (Accessed: 17 May 2023).
Dong, F., Li, K., Li, Y., Liu, Y., & Zheng, L. 2022. Factors influencing public support for banning gasoline vehicles in newly industrialized countries for the sake of environmental improvement: a case study of China. Environmental Science and Pollution Research, 29(29), 43942-43954.
Muehlegger, E. and Rapson, D.S., 2018. Subsidizing mass adoption of electric vehicles: Quasi-experimental evidence from California (No. UC-ITS-2018-33). National Bureau of Economic Research.
Nunes, A. and Woodley, L., 2023. Governments should optimize electric vehicle subsidies. Nature Human Behaviour, pp.1-2.
Nunes, A. and Woodley, L., 2023. Governments should optimize electric vehicle subsidies. Nature Human Behaviour, pp.1-2.
Wang, J., Wang, R., Li, L., & Dong, J. 2022. The market for electric vehicles in China: modeling the abolition of policy incentives. Climate Policy, 22(7), 865-881.
write