Sunday, August 30, 2009

Jeanette's economic illiteracy

Unsurprisingly, the Green Party doesn't understand why the government has abandoned setting minimum fuel efficiency standards for imported vehicles. Quite simply, it would be counterproductive.

Such standards will restrict new and used vehicle imports - that puts up the price of buying a car. So people with existing old less efficient cars would pay up to $1,500 more if such fuel efficiency standards existed than if not. So it is better to just let people pay the market price, then they are more likely to get more efficient vehicles.

This goes way over the head of Jeanette Fitzsimons who clearly thinks "if we regulate so people can only buy fuel efficient cars, they will". Not thinking that reducing the supply of a good puts up the price. It isn't the EU Jeanette, this isn't a huge market and in fact New Zealand remains so poor that a large number of imported vehicles are secondhand.

So take it slowly Jeanette:
1. There is pretty much a free market today for vehicle imports. This means demand and supply are at equilibrium keeping pressure on prices.
2. Imported vehicles are typically newer and more fuel efficient than the ones they replace.
3. Restricting the imports to only vehicles of a certain standard bans certain ones from entering the market, restricting the ability of some to buy a replacement vehicle (which while not meeting your standard is bound to be an improvement). So such people keep older vehicles for longer.
4. The remaining vehicles imported face demand but less supply, so retailers can put the price up.

The analysis demonstrated your policy was wrong.


Owen McCaffrey said...

Are fuel efficient vehicles more expensive than less efficent ones?

So a Daihatsu 1.3 litre is more expensive than a 6 litre holden? Because it is far more environmentally friensly.

You are probably referring to vehicles used for work right? such as utes and trucks?

I suggest then than banning inefficient family cars would not reduce supply at all because a consumer can always buy a smaller cc car which will be much more efficient.

Secondly, vehicles used for business and needing to have larger C's should be exempt on the basis that they might indeed increase in price on average as you said due to efficient models being more expensive.

So Jeanette was spot on if she was referring to cars used for private passenger transport only.

Libertyscott said...

Yes, as a fuel efficiency standard would prohibit certain vehicles from entering the country. As a result, there would be a smaller supply of vehicles coming in to replace the current fleet, so less choice for buyers. As a result, the price is higher, a certain proportion of people hold onto cars for a longer time.

This statement "banning inefficient family cars would not reduce supply at all" is illogical. Of course it would. Banning something reduces the supply of it.

People with 2 or more kids may not want a smaller car, so the market for secondhand large cars would thrive and the price for them would remain stable or even increase. You're assuming people will do what you would do, or even what you want them to do. This is the most disturbing aspect of the Green Party, it is full of people who want to tell others what to do, as if you're the informed adults, and the rest are just stupid children.

Why shouldn't people buy the cars they want? If they want to waste fuel it is their money, it is none of your business as long as they pay for it.

What is a vehicle used for business? Of course it would mean all sorts of ways around this sort of petty regulation. Everyone wanting a big car may set up a shelf company, or find a leasing arrangement with a car leasing firm, or just declare it is "for business".

So no, Jeanette is not spot on, she's economically illiterate. She didn't suggest banning cars of a certain size, but you have. To achieve your goals you need a bigger more intrusive state that threatens and cajoles people into behaviour you regard as "good for them".

If people want a more fuel efficient car they'll buy them, and apparently are doing so, they don't need (nor want) school prefect types telling them to do better.

Owen McCaffrey said...

I need to clarify a bit what i mean't by a big car:

I mean't big in engine size as it is this which produces the emissions. Limiting consumers to buying cars with smaller engine sizes or lower emissions would cause a reduction in prices because cars with smaller engines but the same otherwise are invariably cheaper.

Go have a look at a holden catalogue. The 5 litre cars are more expensive than the 3 litre ones. But they can both do the same things.

Ith regard to business vehicles I was specifically meaning diesel and towing vehicles. Such vehicles would be exempt and would include diesel utes, all light and heavy trucks.

It is fairly simple. Not economically stud=pid as it would cost nobody enything and would make consumer cars cheaper actually.

Libertyscott said...

"mean't"? Sheesh Owen, you're an English teacher? You should be ashamed of yourself (I know I am when I stuff up apostrophes).

No it wouldn't cause a reduction in prices. You clearly need to do some Econ 101. Let me take this slowly.

Cars with smaller engines are cheaper yes. However, you are choosing to restrict the supply of the total number of vehicles by banning a significant segment.

The first thing that would happen if such a ban was seriously going to progress would be that entrepreneurs would import large numbers of large cars en masse, so that they could on sell when you shut down the market. People without sense of economics or business (i.e. Jeanette) forget that interventions promote all sorts of unintended behaviour.

By banning new large cars you will increase demand for secondhand vehicles that are large (putting up the price for them), because funnily enough just because YOU think you know best for people, doesn't mean they'll do what you say.

Secondly, you expect demand for small cars will increase as people buy small cars instead of big cars. That is true. However, when demand for one commodity goes up, so does the price. You see car retailers would see that people now have a far more restricted choice, but still need to renew fleets, so they would price up the smaller cars. As New Zealand is a very small fish in the car consumer sea, the increased demand for small cars would not result in economies of scale of any magnitude to be meaningful. It is basic economics, and perhaps that is the problem, you simply don't understand economics.

However, you make further mistakes. 5 litre cars CANNOT do the same thing as a 3 litre car. If it could people would not buy them, or do you have a more fundamental problem here.

You don't like people choosing something you don't think they should choose to have. You want to control what they do. If someone wants a 5 litre car, then why is it your business? Their money, they buy the fuel, and let's say they pay for any externalities, then why the hell shouldn't they own the car and drive as they please?

Your exemption is more complicated than you think. Are rental cars business vehicles? Is a sole proprietor who buys a big car for her business buying a business vehicle? Lawyers are adept at finding ways around this.

"stud=pid" and "enything"? For shame. Really. I hope you were drunk when you wrote that.

Owen McCaffrey said...

Unfortunately your analysis is quite wrong. NZ is a price taker, not price maker on International auto markets. If demand by Kiwis for smaller cars increased this would make not even a tiny blip on international demand.

People who previously bought larger engined passenger cars have the option of a smaller engined car which serves the same purpose. Should they choose that then the average price of new cars entering NZ will decrease.

If they chose to go for a more expensive fuel efficient large car then that is their choice. It is nothing to cry about because they had the option for a car just as good for the purpose intended but chose a more expensive one.

The point is that no-one is forced to purchase a more expensive car than they are currently.

Therefore what happens to the average price of new cars entering NZ will depend on the choices made by those who buy them. It could go up or down.

The price of used cars in NZ would not change. There would still be the same number of cars as before but they would just be a different mix. It has basically nothing to do with the above situation.

WH said...

Questions for you Owen, as I am struggling to follow your logic .

First, your argument seems to be that you reduce the pool of available cars (all cars) by banning large expensive cars, therefore this reducesthe number of available choices to a consumer who can no longer buy the big expensive car they may have wanted.

Next you believe that within the pool of available cars (that you have determined) that there will be an increase in the number of cars imported to make up for the vehicles now previously banned i.e. previously a total of 50,000 cars came into NZ every year, you still need 50,000 cars (of your new determined size) to enter to match supply and demand. The question that flows from this is whether you believe that there is a readily available international supply of new vehicles (say for example the ban reduces the number of big cars by 10,000 then you need to find 10,000 small cars from somewhere).

From this flows a number of issues, if there is an existing supply of 10,000 small vehicles then why is this excess demand not reducing the existing price of small cars? In our opinion are New Zealanders paying too much for existing small cars?

If there is not a readily available excess supply, presumably a further 10,000 cars need to be produced annually. Now the mariginal cost of the additional car maybe small due to economies of scale, but there may be some time delay between banning large cars and building new small cars, there is also the cost to the manufacturer of switching production lines (a one off fixed cost). Now these two costs suggest that the existing pool of small cars in NZ would increase in value by the one off fixed cost and the cost of the time delay, or do you believe things to be otherwise?

I am interested in your analysis.

I have not yet mentioned the loss/gains of utility from big cars compared to small cars, that can await your responses on the above.