Eco-nomics: Is Cash for Clunkers Bad for Transit?

The New York Times reports today on the Obama administration's claim that "Cash for Clunkers" is improving the average gas mileage of American's cars. I have no doubt that they are correct as statistically when the marginal gas mileage is above the average, the average has to go up (that for my students). But that this program might lower American's gas consumption is far from assured. For as American's trade in older more expensive cars to drive for newer cheaper cars to drive, they will undoubtedly drive more. Given that driving is relatively inelastic with respect to gas prices, it is likely that overall consumption would fall if this program were continued.

So this is good news for the atmosphere in the short-run, but in the long-run this will encourage more driving and less reliance on mass transit. It seems highly likely that this program will work against the administrations efforts to -promote transit and mass transit seems pretty key to a low energy future. Meaning that the atmosphere my suffer in the long-run. While good for consumers, this program is probably bad for transit.

Regardless, the program does seem to be having its intended first-order benefit: US automobile manufacturers are seeing huge increases in sales. But this massive transfer of American's tax dollars is benefitting all car companies, not just American companies or cars made in the US (to do so would create some sticky trade policy problems).

I have a better idea, how about a carbon tax where the proceeds go to fund research and development of newer more efficient automobiles, transit and renewable energy?

Eco-nomics: Will 'Cash for Clunkers' Reduce Carbon Emissions?

In my search for the perfect car to replace my current one, I have stated that I am in no hurry: mine is pretty fuel efficient, relatively low-mileage and has been a great car to own and drive. Above is a picture of the Tesla S, an all-electric car that should be available when mine is ready for replacement and can go up to 300 miles on a single charge. Now we are talking my language!

Anyway, the idea that I would hasten to trade-in my current car raises some interesting general equilibrium issues as I have mentioned: what does this do to the used car market, the volume of new car production, etc.

The new 'Cash for Clunkers' bill is a good vehicle to use to discuss these issues. In it, if you have a relatively low mileage car (18 mpg or less) no older than a 1984 model, you can get a voucher worth up to $4,500 for trading-in that car and buying one with significantly higher mileage. But will this lower fuel consumption and emissions? It is not clear. First, with all of these traded-in high mileage cars on the used car market we can expect the price to be pushed down significantly which will increase quantity demanded even with the high mileage. So people will buy these cars that might not have bought at car at all or who would have bought a higher mileage car. Second, this may lower the threshold for scrapping cars and increase the production of new cars which is pretty energy intensive one imagines. So will the net effect be a reduction in carbon emissions? I am doubtful.