The opportunity costs of cash-for-clunkers
Submitted by Aguanomics Blog
This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.
Hui Gao says:
“Clunker for Cash” was one of the government programs to stimulate the down turn economy recently. The incentive of this program was to stimulate the auto industry and people’s purchasing power in order to push up the economy. Apparently there was a big impact on the auto industry because of the people’s strong responding to this program. It showed that August was the best selling month in the past three years, for the demand of new cars were crazily increased.
However, in my point of view, the stimulation was only benefit on certain people, such as those people who have extra money to pay for the down payment after 4,500 dollars rebate; who will have extra money to pay for the two ways insurance for the new car; who have a qualify car, etc. If we are only focusing on the auto industry, it was unquestionable that there was huge increase in the auto outstanding accomplishment.
Does it mean that there is a ripple effect on this stimulation? However, when we see the economy as a whole, there is an opportunity cost in this stimulation, which means that one person must sacrifice one thing to get another thing. For example, Mr. Chen was planed to remodel his house using about 15,000; because of the “Clunker for Cash” program, he decided to use the 15,000 to trade in his old car to a new car with the 4,500 rebate. The opportunity cost of this decision was to live in the same house without remodeling, but with a new fuel efficiency car. Apparently it seems both Mr. Chen and the auto industry are benefit from this program. On the other hand, most people tend to forget there is a third party involved in this transaction, which are the stores that Mr. Chen was planed to spend the money on the material for remodeling his house. Those stores lost the business from Mr. Chen. This is the similar example as the one “The Broken Window” in the “Economics in One Lesson”.
Bottom line: We should see the economy as a whole, not only individual. Don’t only focus on what is immediately visible to the eye.I believe the best way to stimulate the economy nowadays is to increase every people’s purchasing power, but this is also the hardest mission ever.
