Monday, March 1, 2010

Cash for Clunkers in Appliances

Following the cash-for-clunkers automobile program during Summer 2009, a host of US states are creating a cash-for-clunkers program for household appliances. During Summer of 2009, I wrote about the unintended consequences of such a program.

Now I would like to think about the economic welfare (i.e. well-being) of such as subsidy. Subsidies will increase the demand for a product and also increase the supply of a product. So, if the market is in equilibrium, the equilibrium price falls and equilibrium quantity increases beyond what we would expect in a market without a subsidy. In this case, the benefits of consuming are less than the total costs (including the subsidy) of consuming beyond the non-subsidy equilibrium quantity, and the gains from consuming are less than the costs of consuming, meaning that for each dollar spent we will be getting back less than that. In the USA Today article, two economists from the University of Delaware find that for each dollar spent on the subsidy, we will get 94 cents back in benefits, which is a social loss.

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