The reason for this scheme is that it is now considered that diesel fuel is more polluting than petrol. This is especially true of older diesel engines (mainly an ageing thing I think). The negative externalities of consumption associated with diesel are now thought to be more severe than previously thought (indeed it was thought diesel was better than petrol for the environment because less was needed to travel the same distance).
The proposal might be called a 'nudge' by behavioural economists, because they don't really understand subsidies! This scheme proposes to give a minimum payment, in excess of the market value of old diesel vehicles, to incentivise people to trade in their old vehicle for a brand new one. The new vehicles will emit less pollution and there is therefore a win for the environment as the market moves closer to allocative efficiency.
The scheme will effectively shift the demand curve for new vehicles to the right with the price difference between what the consumer is prepared to pay and the price they must pay covered by the government. Not everyone will trade in their diesel cars and vans, but some will and this will help efforts to reduce harmful pollution.
There is an interesting benefit for car and van manufacturers of course, they sell more new vehicles and so there will be a boost to Aggregate Demand and employment. The benefits will go to all manufacturers, not just those in the UK and so a Europe wide scheme would make the most sense.
This article has most relevance to IB who look at market failure in more detail than VCE. It is, however, a useful example of how governments can intervene in markets to improve resource allocation for everyone. Please note the Daily Express is not the only paper to cover this and I'd never recommend it as a serious newspaper generally, but I thought the Guardian and BBC deserved a rest.
