The sale of new SUVs and pickup trucks has dropped precipitously in recent months amid soaring gas prices and a weakening economy: SUV sales for the month of April alone fell 32.3 percent from a year earlier and small car sales rose 18.6 percent. This fundamental shift comes against a backdrop of relentless gas increases, and growing concerns over the environment and US oil consumption, according to auto analysts and car dealers.
Incentives matter. The balance between fuel cost and fuel economy is an incentive. Demand for fuel is relatively inelastic, since we don’t seem to be driving less. But demand for more fuel efficient cars is elastic. The late-1970s demonstrated this. I doubt that this apparent shift in consumer behavior surprises anyone.
I have a hard time accepting this, though:
“The SUV craze was a bubble and now it is bursting,” said George Hoffer, an economics professor at Virginia Commonwealth University whose research focuses on the automotive industry. “It’s an irrational vehicle. It’ll never come back.”
I expect to see that quote in every 2008 article on SUVs and gas prices. But from an economist? That’s too much. Under what assumptions is it an irrational vehicle? All contexts for all buyers? Some contexts for some buyers?
Suppose a new car buyer gets a significant incentive on an SUV. She considers her decision under the following conditions:
This is a superficial analysis that assumes all other factors (i.e. car price) are equal. If that is the proper set of assumptions and the choice is incentive 1, is the SUV an irrational vehicle?
Of course, all other factors are not equal. The price of the two cars will likely be different. The price of gas might be $8 per gallon in five years. The options available will probably be different. The safety features may be different. Her needs for those 6,000 miles could tilt to one or the other. The buyer’s annual income could be $15 million instead of $15 thousand. And so on, with any number of possible deviations from some universal evaluation that an SUV is automatically irrational. All tastes and preferences are subjective, and non-monetary criteria factor into decisions. What are Jane Doe’s tastes and preferences? Does John Doe possess the same tastes and preferences?
It’s certainly possible – and I hope it’s the case – that the author quoted Mr. Hoffer out of context here, that some qualifier from his statements is missing. As it is presented in the article, though, it’s indefensible.
Via the MINI-enthusiast site MotoringFile.
Post Script: A commenter on the MotoringFile entry makes the common, uninformed mistake regarding oil company profits.
Last year, Exxon/Mobil made a $40 BILLION profit. The biggest profit ever, by any company, in the entire history of the world. $40 BILLION. In a year that was considered by many (US speaking) to be on the edge of a recession. In a year that millions of Americans were hurting.
Wouldn’t $20 Billion have been enough? No? $30 Billion? How much is enough? What about shaving a few dollars here and there in the interests of what’s best for Americans? Naw. What about some gov’t cap? Isn’t price fixing sort of illegal?