In my search for the perfect car to replace my current one, I have stated that I am in no hurry: mine is pretty fuel efficient, relatively low-mileage and has been a great car to own and drive. Above is a picture of the Tesla S, an all-electric car that should be available when mine is ready for replacement and can go up to 300 miles on a single charge. Now we are talking my language! Anyway, the idea that I would hasten to trade-in my current car raises some interesting general equilibrium issues as I have mentioned: what does this do to the used car market, the volume of new car production, etc.
The new ‘Cash for Clunkers’ bill is a good vehicle to use to discuss these issues. In it, if you have a relatively low mileage car (18 mpg or less) no older than a 1984 model, you can get a voucher worth up to $4,500 for trading-in that car and buying one with significantly higher mileage. But will this lower fuel consumption and emissions? It is not clear. First, with all of these traded-in high mileage cars on the used car market we can expect the price to be pushed down significantly which will increase quantity demanded even with the high mileage. So people will buy these cars that might not have bought at car at all or who would have bought a higher mileage car. Second, this may lower the threshold for scrapping cars and increase the production of new cars which is pretty energy intensive one imagines. So will the net effect be a reduction in carbon emissions? I am doubtful.
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