Burton Abrams and George Parsons of the University of Delaware evaluated the efficiency of the recently concluded Cash for Clunkers (CARS) program and concluded that the cost exceeds the benefit by approximately $2,000 per vehicle, or close to $1.4 billion in total. Their paper appears in the online journal The Economists’ Voice.
Abrams and Parsons calculated the average national cost per vehicle turned in to be scrapped under CARS at $2,600. There is a $4,200 loss to the taxpayer (the average subsidy), but the CARS participant gains $1,600 per vehicle ($2,600 in the value of the price subsidy less the $1,000 loss of the clunker).
Assuming 12,000 as the average miles driven per year and using the average mpg of the retired vehicles (15.8 mpg) and the newly purchased vehicles (25.0), they calculated that the program cut gasoline consumption by some 280 gallons per year per vehicle. Assuming the average clunker would have lasted 3 more years (at which time a new, higher mpg vehicle would have been purchased), the gasoline savings works out to 804 gallons per vehicle on average.
Using an estimated cost of $0.71 per gallon for CO2 and criteria pollutant costs (Jason Hill et al., PNAS), Abrams and Parsons calculated the environmental benefits of the clunker program (ignoring discounting) at about $596 per vehicle.
With per vehicle environmental benefits at $596 and the costs at $2,600 per vehicle, the clunker program is a net drain on society of roughly $2,000 per vehicle. Given the approximately 700,000 vehicles in the program, we estimate the total welfare loss to be about $1.4 billion.
The welfare loss would be even greater if we fine tuned our estimate of the social cost per gallon to account for the spatial mix of clunkers...Even if the environmental gains were double our estimate, the net drain would still be close to $1 billion. While a more rigorous analysis would no doubt adjust these figures, we doubt that the basic conclusion would change.—Burton and Paarsons (2009)