Reference no: EM131460004

Question: During a recent summer, the federal government undertook the temporary Car Allowance Rebate System, abbreviated CARS but popularly known as the Cash for Clunkers program. Under the plan, drivers of qualifying cars from the years 1984 through 2002 with an EPA-rated efficiency of 18 miles per gallon or less received a voucher worth $3,500 to $4,500 for trading those cars in to purchase a new car with an EPA rating of 22 miles per gallon or better. (The voucher amount varied depending on the difference in miles per gallon between the trade-in and the new purchase.) In other words, the government wanted to encourage the purchase of efficient new cars by, in effect, temporarily reducing the price to qualified buyers. The purpose of the plan was twofold: one goal, motivated by the recession-weakened economy, was to "shift expenditures by households, businesses, and governments from future periods when the economy is likely to be stronger, to the present when the economy has an abundance of unemployed resources that can be put to work at low net economic cost," as stated by Christopher Carroll.

The second goal was to reduce harmful emissions by getting a large number of older, gas-guzzling vehicles off the road. While some critics said the plan would simply pull future sales into the rebate period, resulting in no net increase in sales, several studies have shown that Cash for Clunkers was a success. More than 130,000 cars were traded in, and the budgeted allocation of $1 billion for the rebates was gone within a week. Congress had to quickly authorize the release of an additional $2 billion to keep the program going for the announced time period. More than half the cars traded in were at least ten years old and about eight in ten had been driven more than 100,000 miles. In an even more striking result, another quarter-million cars were sold during the Clunkers period to buyers who wanted to cash in, didn't qualify, and decided to purchase a new car anyway. Many of these "halo sales" were of fuel-efficient hybrids, further contributing to what the U.S. Department of Transportation says was a mileage gain of nearly ten miles per gallon overall on vehicles purchased during the plan, compared to the goal of increasing efficiency by four miles per gallon.

"Our findings not only provide strong evidence that many more vehicles were sold as a direct result of the incentive program than were previously estimated," said the vice president of an auto industry research group. "They also largely debunk the myth that ‘cash for clunkers' mortgaged future car and truck sales. In fact, the program resulted in sales of vehicles to people who don't normally buy them." Some estimate that more than 540,000 of the purchases made during the plan were to buyers and lessees who wouldn't have made a purchase without the cash incentive. And with car sales continuing to rise, the research group concludes, "the program did not [mortgage] the future of the industry by stealing sales that would have occurred otherwise." And according to the National Highway Traffic Safety Administration, the CARS program saved or created nearly 60,000 jobs.

1. Who really pays the cost of a government price-incentive plan like Cash for Clunkers? Why? What other ways can you think of to distribute such costs?

2. The cash incentive in the CARS plan appears to have succeeded in its goal of reducing harmful emissions. What lessons do you think that success offers for other efforts to safeguard the environment?