Market Failure -- Cash for Clunkers

In 2009, amidst the economic turmoil still lingering from the recession that began the year prior, the United States Federal Government started a stimulus program called the Car Allowance Rebate System (CARS), more popularly known as "Cash for Clunkers". The idea was simple: offer $3,500-$4,000 rebates to consumers for trading in their older model, gas guzzling, environmentally unfriendly automobiles for new, more efficient models. The program was expected to give a much needed boost to the auto industry, provide an opportunity to consumers suffering in a recession to buy a new car, and reduce pollution caused by high emission vehicles, all while reducing overall fuel consumption in the United States.

The program quickly gained popularity and attracted the attention of the entire nation. On July 24, 2009, Cash for Clunkers kicked off with a 1 billion dollar budget that was projected to last until November; and within six days, all the money was gone. Congress then released an additional 2 billion dollars on July 29, 2009 that lasted just three weeks, after which the program was ultimately pulled on August 24, 2009, just one month after its inception. (Hollenbeck)

The first concerns with the program came with the delay of reimbursement on the rebate to the dealers. The immediate response by the market and high volume in sales caused the Department of Transportation, the group ultimately charged with the task of processing each and every rebate, was backlogged and not paying the dealerships within a timely manner. This issue caused several already strained dealerships to withdraw from the program entirely. (Wall Street Journal)

On October 29, 2009, the United States Department of Commerce released a report announcing the Gross Domestic Product (GDP) had risen 3.5% in the third quarter of 2009. (Stewart & Dail) While the 3.5% growth in one month seemingly was a huge victory for the economy, it was very misleading to a general public that might not understand what comprises the GDP. Gross Domestic Product is defined as, "the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living." The GDP is comprised of four areas: consumer spending, business investment, government spending, and net exports of goods and services. It was reported that in July 2009 alone, the government pumped over 174 billion dollars into the United States economy through various incentives, grants, student loans, and stimulus packages, while the GDP only grew by 150.3 billion dollars. (Gillespie) So while there were optimistic reports about the improvement to the economy, the result was directly correlated with the inputs from the government, which vastly exceeded the return.

There were also the unforeseen costs that, in some cases, were not fully realized until the