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?

Answer 1

• Crushing and disposal of old and dilapidated cars shall not cause direct demand for cars. Since already traded cars are being crushed and disposed off by the car dealers. Trade of used cars has already given rise to demand for cars.
• But offer of amount to cars dealers by government may motivate car dealers to reduce prices of new cars in exchange for used cars. In this way, demand for new cars may experience spike.
• In this way, through indirect medium, Cash for clunkers shall give rise to demand for new cars. Employment and output shall rise.
• There shall not be immediate rise in demand for new cars, it may take time to new schemes to get reflected in rise in demand for new cars. Hence, demand may not rise in 2009 and it will better reflect in 2010.
• Obviously , it will increase living standard of Americans people by two ways, people will switch to new cars and second, availability of employment opportunities will increase income of people.

crime destroyed 700,000 automobiles:

• Destruction of well functional cars by criminal would probably undermine the living standard of American. Firms may not be able to given enough amount to owners to exchange used cars for new cars.