Opportunity costs by definition are the benefits forgone by choosing one alternative from the opportunity set (set of alternative actions available to a decision maker). This article will talk about what a possible opportunity cost could have been when President Obama and the government decided to go with an auto industry program and how it has affected that industry now.
Cash for Clunkers, the extremely popular rebate program signed into action by President Obama on June 24, 2009, ended earlier than expected on August 24, 2009 at 8p.m. This was also referred to as CARS – Car Allowance Rebate System. The plan behind this program was to improve both our economy and environment. It was intended to persuade owners of clunkers to trade them in for a $3,500-4,500 rebate towards a new, more fuel efficient vehicle. The clunkers were divided into categories based on their weight and MPG. The hope was the economy would benefit from the purchases and jobs kept, as would the environment with vehicles that had better fuel economy on the road.
Cash for Clunkers information:
– Nearly 690,000 vehicles were traded in during June 24th – August 24th
– 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 top three clunkers traded in were Ford Explorer, Ford F-150, and Dodge Grand Caravan
– More than half of the vehicles bought were passenger cars
– The average MPG of the new vehicles purchased was 24.9
Not being one of the decision makers for this program, I can only guess as to what other options, or opportunity costs, were discussed when deciding to implement Cash for Clunkers. One idea I have is that a car inventory surplus or forecasted inventory in 2010 would be an opportunity cost. All of the benefits to new car owners, the auto industry, maybe the economy, and the environment may highly outweigh this assumption, but I feel it is worth discussing.
I recently purchased a new vehicle and I was affected by the aftermath of the program. I did not participate in the Cash for Clunkers program for a couple of reasons, but two mainly. One was that I owned my car and enjoyed not having a car payment if I did not have to and the other was that my car, a 2002 Ford Escape, did not qualify as a clunker. As my Escape showed signs of a soon to be demise, I looked into purchasing a new car. This is where I saw an opportunity cost of the program -an abundant car inventory that we, as consumers, are used to.
There are many types of vehicles to choose from, but I was unaware of the limited choices I had when I made my decision on a 2010 Rav4. I thought a little about a passenger car, but know I would only be happy in an SUV. As I told the dealer my specifications on options, features, and color, I realized it would be hard to find. The dealer explained to me that Toyota’s Rav4 inventory had taken a large hit being one of their biggest sellers during the Cash for Clunkers program. Since I was specific, I had to wait two weeks to finally be able to take my car home. If this happened at Toyota, it most likely did at other large auto companies too.
All of this lead me to think when the government was weighing each option deciding on this, was a car shortage on their mind? If so, one of the opportunity costs in the set would be to maintain an ample inventory of vehicles. As mentioned before, the benefits of the program in actuality and in the planning process outweighed this, but it may have been considered.
Was Cash for Clunkers good? It all depends on how you look at it and what you determine “good” to be. 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 review when forming their decision, but this program did help our country during a time when we needed it. It pushed some consumers out to buy vehicles in 2009 that may have waited until 2010.
In summary, Cash for Clunkers was a decision made by the President and government to help the economy and environment. If there is an industry-wide decrease in inventory, that is a drawback of the program. But looking at the opposite side of that flaw, there may have been an opportunity cost of keeping a normal inventory in the opportunity set of actions.