Short and Long-Term Cost Efficiency Analysis of Fossil Fuel versus Alternative Energy Vehicles

Electric and hybrid-electric vehicles have long been seen as the answer to the economic and environmental problems created by traditional fossil fuel vehicles. In addition to the ability to reduce carbon emissions and reduce negative environmental externalities, they have the potential to end the current dependence on limited fossil fuel reserves and thus enhance energy security. However, the facts that electric and hybrid-electric vehicles have not attained widespread use within a free-market economy like that of the US points towards an overarching problem with alternative energy vehicles: cost-inefficiency. This paper aims to investigate and quantify the extent to which alternative energy vehicles are not as cost-efficient to the average US consumer as traditional fossil-fuel based vehicles. To accomplish this goal, a mathematical model was created to quantitatively measure the microeconomic effects affecting the short and long-term prices of driving an electric or hybrid car, taking into account such factors as baseline prices in vehicles, power costs, changes in the interest rates, and gasoline prices over the span of a decade. Overall, the data points towards the fact that, in addition to the substantially larger short term costs of alternative energy vehicles, the long-term energy savings of purchasing an electric or hybrid-electric car still do not compensate for the initial price difference between conventional fossil-fuel cars and alternative energy cars to the average US consumer at this time. This, however, assumes a totally laissez-faire model with automobile and energy prices set by the free market alone. In reality, it is likely that government policies aimed at supporting the alternative energy vehicle market will not only continue to be implemented but also grow in importance within the coming decade, and this paper also examines some of the macroeconomic effects that the government policies could potentially introduce to lower the costs and improve the economic efficiency of alternative energy vehicles.