Cross-State Spillovers of Regulation Under National Pricing Strategies

When policies differ across regions but prices are not set independently across regions, the equivalency between demand- and supply-side policy instruments breaks down. Drawing on price discrimination theory, the paper presented in this Decarbonization Seminar / Joint Seminar ZEW and MISES shows that regional demand-side tools such as consumer subsidies generate effective price variation across regions for a product, while producer subsidies do not, creating different incentives for firms and ultimately different policy responses. The paper studies the interaction between firms' pricing strategies and the US state-level Zero-Emission Vehicle (ZEV) policy that gives automobile manufacturers incentives to sell electric vehicles in California and nine other states. Focusing on 2012–17, the authors build and estimate a structural model of the market for new passenger vehicles, examining the impacts of the ZEV program in the regulated region and spillovers to other states. The authors compare the ZEV policy to a counterfactual demand-side subsidy and tax that holds incentives per vehicle in ZEV states fixed. Under the assumption that Tesla sets national prices, the estimates imply that the demand-side policy would increase electric vehicle sales in the US by 13%.