Under the “Cash for Clunkers” program of July-November 2009, the government paid
ID: 1222494 • Letter: U
Question
Under the “Cash for Clunkers” program of July-November 2009, the government paid car dealers between $3500 and $4500 per vehicle to destroy approximately 700,000 old used cars traded in when purchasing a new automobile. Would you expect this program increase new car sales, output, and employment in the auto industry in 2009? What impact would you expect it to have on new car sales in 2010 and subsequent years? Did it improve the living standards of Americans? Would Americans be better off if an outbreak of crime destroyed 700,000 automobiles during the next few months? Why or why not?Explanation / Answer
It is a common pratice to sell the old car and buy the new one. Remember latet model in geneal are technically superior. So they are more effective in rendering services. They are more productive as they can give more comfort, better mileage, minimizes polllution, reduces probability of accident etc. Hence destruction of old car and substitute them by a new one, is as effective as the improvement in welfare of the society. The government has decided to pay $3,500 to $4500 for destruction of old car. About 700,000 car will be destroyed in this process. No doubt it will boost up sell of new car. There may be many persons who are using old model although they can easily afford to buy a new car. If car is essential for them, then definitely they will buy the new one. However some not so well useres will be affected from this policy, as they cannot afford to buy a new one. But car has become almost essentials in daily life. Its demand elasticity is less than one. So it is expected that the policy of old car destruction will increase sell of new car. In effect production of car will rise. Employment opportunities will grow. It is expected to happen in year 2010 and onwards.
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Now consider a situation when crime outbreak has destroyed 700,000 old car. So government does not require the payment of $3,500-$4,500 per car for destruction. It will save lots of money of government which can be effectively used in other productive areas. But the impact of crime is huge in the society. It destroys normal working environment of the economy. People fell insecured. As a resullt, production and normal economic life are seriously affected. Loss from these are beyond comparison and has prolonged effect. So whatever small amount is saved becomes useless. Rather welfare level of the society will decrease. Hence outbreak of crime as an alternative to governments old car destruction policy will bring harm to the society and so is not desirable.
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