Auto Inventory 2010: An Opportunity Cost of Cash for Scrap?
Opportunity costs, by definition, are the benefits that are lost when choosing an alternative from the opportunity set (set of alternative actions available to a decision maker). This article will talk about what could have been a possible opportunity cost when President Obama and the administration decided to adopt an auto industry program and how it has affected that industry now.
Cash for Clunkers, the extremely popular rebate program signed by President Obama on June 24, 2009, ended earlier than expected on August 24, 2009 at 8 p.m. This is also known as CARS – Cash Allocation Rebate System. automobiles. The plan behind this program was to improve both our economy and the environment. He was intended to persuade junk owners to trade them in for a $ 3,500-4,500 rebate for a new, more fuel efficient vehicle. The gadgets were divided into categories based on their weight and MPG. The hope was that the economy would benefit from purchases and maintained jobs, as would the environment with vehicles that had better fuel economy on the road.
Cash for Clunkers Information:
– Almost 690,000 vehicles were exchanged between June 24 and August 24
– The total money spent by the government was $ 2.9 billion
– The top five car models purchased were Toyota Corolla, Honda Civic, Ford Escape, Nissan Versa and Hyundai Elantra.
– The three main pots marketed were Ford Explorer, Ford F-150 and Dodge Grand Caravan.
– More than half of the vehicles purchased were passenger cars
– Average MPG of new vehicles purchased was 24.9
Not being one of the decision makers for this program, I can only guess what other options, or opportunity costs, were discussed when deciding to implement Cash for Clunkers. One idea I have is that a surplus car inventory or a forecast inventory in 2010 would be an opportunity cost. All the benefits to new car owners, the auto industry, maybe the economy and the environment can far outweigh this assumption, but I think it’s worth discussing.
I recently bought a new vehicle and was affected by the aftermath of the show. I did not participate in the Cash for Clunkers program for a couple of reasons, but mainly for two. One was that I owned my car and enjoyed not having a car payment if I didn’t have to, and the other was that my car, a 2002 Ford Escape, didn’t qualify as a junk. Since my Escape was showing signs of an upcoming disappearance, I considered buying a new car. This is where I saw an opportunity cost of the program: a plentiful inventory of cars that we as consumers are used to.
There are many types of vehicles to choose from, but I was not aware of the limited options I had when I made my decision on a 2010 Rav4. I thought about a passenger car a bit, but I know that I would only be happy in an SUV. When I told the dealer my specs on options, features and color, I realized that it would be difficult to find. The dealer explained to me that the Toyota Rav4 inventory had been very successful as one of their biggest sellers during the Cash for Clunkers program. As it was specific, I had to wait two weeks to finally get my car home. If this happened at Toyota, it most likely happened at other large auto companies as well.
All of this leads me to think that when the government was weighing each option when deciding on this, did they have the car shortage in mind? If so, one of the opportunity costs in the pool would be maintaining a large inventory of vehicles. As mentioned above, the benefits of the program today and in the planning process outweighed this, but may have been considered.
Was Cash for Clunkers good? It all depends on how you see it and what you consider “good”. In my opinion, if it boosted the economy just a little bit and helped the environment, then yes it was. There are many other factors that analysts look at when making their decision, but this program did help our country at a time when we needed it. It pushed some consumers to buy vehicles in 2009 that may have waited until 2010.
In short, Cash for Clunkers was a decision made by the president and the government to help the economy and the environment. If there is a decrease in inventory across the industry, that is a drawback of the program. But looking at the opposite side of that failure, there may be an opportunity cost of maintaining normal inventory across the opportunity action set.