Abrams and Parson (AP) show that the cash-for-clunkers program as it was actually was configured was not a potential Pareto improvement: the gain to the winners was much less than the loss to the losers. Accept all their numbers. The basic idea of this question is to find out whether Congress could have designed any variant of the cash-for-clunkers program where benefits did exceed costs.
a. Keep the eligibility rules about gain in miles-per-gallon (mpg) the same. What is the maximum amount that the government can pay for a clunker (which it will destroy), if program benefits are going to exceed program costs? Assuming that all owners value their clunkers at the average in the AP paper, how many will be traded in?
a. Keep the eligibility rules about gain in miles-per-gallon (mpg) the same. What is the maximum amount that the government can pay for a clunker (which it will destroy), if program benefits are going to exceed program costs? Assuming that all owners value their clunkers at the average in the AP paper, how many will be traded in?