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Essay 3 - Chs 3 & 5(4) - Supply & Demand The Car Allowance Rebate System...

Essay 3 - Chs 3 & 5(4) - Supply & Demand

The Car Allowance Rebate System (CARS), colloquially known as "cash for clunkers", was a $3 billion Federal program in 2009 intended to provide economic incentives to U.S. residents to purchase new, more fuel-efficient cars and get rid of their older "clunkers" that polluted the environment. Potential buyers were given a credit up to $4,500 to buy a new car, while trading in their older less fuel-efficient car, which was then destroyed (turned into scrap metal). The program was promoted as providing stimulus to the economy by boosting auto sales, while putting safer, cleaner, and more fuel-efficient vehicles on the roadways.

Some economists have criticized the program for its negative effect on poor people. How could this happen? Answer this question by using a supply and demand model. Specifically, there are three tasks:

1. Explain how the program affects the equilibrium price and equilibrium quantity of used cars. This explanation should correspond to what is happening in your graph in (2) below.

2. Draw a supply and demand diagram and show what happens to the equilibrium price and equilibrium quantity in the market for used cars, after this program is implemented.

3.  How does this program affect poor people?

Make sure you label your graph correctly. Look carefully at the supply and demand graphs in Figure 3.10 in Chapter 3. Be sure to label the equilibrium changes, "E1" and "E2" as in the graph in the text book.

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