Subsidy for SUV's and December's Increase in Demand for Large Vehicles
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Price Of SUV’s Quantity of SUV’s S* Demand* Qe “A” Pe= $50,000 Market for SUV’s Assume Auto Dealers are operating On a SHORT RUN Supply Curve. Meaning they can sell all the SUV’s on their lot for $50,000 each, hence the HORIZONTAL Supply Curve. Currently consumers Are willing and able to pay $50,000 for each one. The Market is in Equilibrium at Point “A”
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Transcript of Subsidy for SUV's and December's Increase in Demand for Large Vehicles
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
Assume Auto Dealers are operatingOn a SHORT RUN Supply Curve.
Meaning they can sell all the SUV’s on theirlot for $50,000 each, hence the HORIZONTAL
Supply Curve. Currently consumersAre willing and able to pay $50,000 for each one.
The Market is in Equilibrium at Point “A”
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
Prior to December 1st 2014 consumers Of SUV’s who used them for “business purposes” were entitled to take a $25,000 Depreciation Allowance on an SUV over 6,000llbs.
Assuming the taxpayer is in the 25% tax bracket, this means they would get a subsidy in the form of reduced taxes in the amount of $6,250 dollars. Here is the math:
The SUV cost 50,000. Consumer can subtract $25,000 of the purchase price from their taxable income. $25,000 times 25% tax bracket = $6,250 in tax savings. So……
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“B”
….this effectively DECREASES the cost of the SUV for the consumer by $6,250 to $43,750.
Price Decreases and Quantity Demanded INCREASES to “Q1”.
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“C”
$6,250 SUBSIDY“B”
The SUV dealer STILL gets their $50,000 BUT they get to sell “Q1”-”Qe” MORE SUV’s
The difference between “B” and “C” is the amount of the Subsidy.
Good for Consumers AND Producers!
But Wait! IT GETS BETTER!!
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“C”
$6,250 SUBSIDY“B”
In December 2014 the US Congress extended this Subsidy to $500,000 from $25,000. Read that AGAIN!(the subsidy applies to other equipment a producer might purchase too, but we are just using SUV’s as an example)
So, now our consumer can deduct the whole $50,000 purchase from their taxable income.
This will amount to a savings of $12,500 in taxes which….
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“C”
P2=$37,500
Q2
“D”
“B”
…effectively gives us a discount on the purchase price and now the SUV only Costs $37,500.
Price DECREASES and Quantity Demanded INCREASES to “Q2” at Point “D”
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“C”
$12,500 SUBSIDY
P2=$37,500
Q2
“D”
“B”
“E”
Now the Dealer is selling MORESUV’s than before, “Q2”-”Q1”but they are still receiving $50,000 for them—Point “E”.
The difference between Point “D” and “E” is the amount of the Subsidy.
Consumers are consuming more SUV’s because of the tax subsidy.
PriceOf
SUV’s
Quantity of SUV’s
S*
Demand*
Qe
“A”Pe= $50,000
Market for SUV’s
P1=$43,750
Q1
“C”
$12,500 SUBSIDY
P2=$37,500
Q2
“D”
“B”
“E”
A FREE LUNCH for Dealers and Consumers of SUV’s!
But, we know SOMEONE pays for it, Right?
You figure that out. I am done!
