Opportunity costs, by definition, are the benefits foregone by choosing an alternative from the opportunity set (set of alternative actions available to a decision maker). This article will talk about what a possible opportunity cost might have been when President Obama and the administration decided to implement a program for the auto industry and how it has affected that industry now.
Cash for Clunkers, the extremely popular rebate program that President Obama launched on June 24, 2009, ended earlier than expected on August 24, 2009 at 8 pm This was also called CARS – Car Allowance Rebate System. The plan behind this program was to improve both our economy and the environment. The intent was to persuade clunker owners to trade them in for a $3,500-4,500 rebate for a new, more fuel-efficient vehicle. The clunkers were divided into categories based on their weight and MPG. The hope was that the economy would benefit from the purchases and jobs saved, as would the environment with vehicles that had better fuel economy on the highway.
Cash for Scrap Information:
– About 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.
– Top three clunkers swapped in were Ford Explorer, Ford F-150 and Dodge Grand Caravan
– More than half of the vehicles purchased were passenger cars
– Average MPG for 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 in deciding to implement Cash for Clunkers. One idea I have is that excess car inventory or projected inventory in 2010 would be an opportunity cost. All the benefits to new car owners, the auto industry, perhaps the economy, and the environment may far outweigh this assumption, but I think it’s worth discussing.
I recently purchased a new vehicle and was affected by the consequences of the program. I didn’t participate in the Cash for Clunkers program for a couple of reasons, but mainly 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 junk. Since my Escape was showing signs of an impending demise, I thought about 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 wasn’t aware of the limited options I had when I made my decision on a 2010 Rav4. I gave a little thought to a passenger car, but I know I’d only be happy in an SUV. When I told the dealer my specs on options, features, and color, I realized it would be hard to find. The dealer explained to me that Toyota’s Rav4 inventory had done very well being one of their biggest sellers during the Cash for Clunkers program. As was specific, I had to wait two weeks to finally get my car home. If this happened at Toyota, chances are it has happened at other big car companies as well.
All of this leads me to think that when the government was weighing every option to decide on this, was it thinking about the car shortage? 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 currently and in the planning process outweighed this, but it may have been considered.
Cash for junk was good? It all depends on how you look at it and what you determine is “good.” In my opinion, if it boosted the economy 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 helped our country at a time when we needed it. It pushed some consumers to buy vehicles in 2009 who 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 flaw, there may be an opportunity cost of carrying normal inventory in the opportunity stock set.
