Reference no: EM133066290

Sport utility vehicles, or SUVs, have been part of the US automotive market since the introduction of the Chevrolet Suburban in 1935. SUVs gained some in popularity in the late 1940's, with the introduction of the Jeep and the Land Rover. The market for SUVs exploded in the 1990's. One reason was the "domestication" of the vehicles, as they became more like cars in their performance and comfort. In addition, before 2007 SUVs were not included in the same category with cars for the purpose of calculating manufacturers' overall corporate average fuel economy (CAFE). Today, light trucks and SUVs account for 77% of the US market. With this trend in mind, Ford has announced it will be phasing out all but two cars in its North American portfolio, shifting its emphasis to light trucks and SUVs.

The ascendance of SUVs involves many issues that interest economists, such as: externalities, discounting and forecasting, prisoner's dilemma, availability bias, conspicuous consumption, and peer pressure.

Please address the following questions:

-From the point of view of buyers, in what ways was it rational to buy an SUV instead of a car?

-In what ways was it irrational?

-From the point of view of society, have market forces led to an optimal level of SUV sales?

-Are there actions the government could take that would lead to a more optimal outcome?