Monday, August 17, 2009

Cash for Clunkers

One of the topics in Prin. of Microeconomics is how government policy such as how taxes and subsidies affect markets. One of the conclusions I draw from the analysis is that while government policy can achieve a specific objective, there are almost always unintended consequences. Here is a case in point.

The recent "cash for clunkers" program here in the US is a government policy to revive US auto sales. It has been a success, with US auto manufacturers selling about 50% of all cars sold under the program. One of the elements in the "cash for clunkers" program is that "clunkers" traded in now go to the scrap heap, not the used car market. Thus we see that the supply curve for used cars is shifting to the left - since some of those cars would have been traded-in and re-sold to used car dealers. This is no longer the case. As the supply curve for used cars shifts to the left, this results in an increase in the price of used cars, which is again helping US auto manufacturers, but hurting low income used car consumers.

Additionally, some economists are concerned that the government program will induce too many cars purchased, at the expense of other durable goods. In other words, families only have so much money to spend, so if too many purchase cars, there are fewer to purchase other goods, and this has negative effects on businesses and employment. Hence we may just be shifting higher unemployment from the auto industry to other businesses.

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