French Subsidy To Scrap Old Autos Fails
August 21, 2000
Subsidies are a standard ploy by politicians to spur investment in their locality and encourage certain types of behavior. However, the effectiveness of subsidies is questionable. A recent study analyzed France's "scrapping" subsidy, an incentive of 5,000 francs for scrapping a used vehicle and buying a new one. The goal was to spur the purchase of automobiles and increase employment in the automobile industry. The study found that while the tax credit did encourage the French to trade in their old cars and increase automotive sales, it was only a temporary effect.
- In 1993 when the subsidy was first approved, automobile sales increased by 8 percent.
- However, by 1995 sales were 2 percent lower than they were before the subsidy.
- In 1996, another similar subsidy was implemented and sales returned to their 1993 levels, but fell to their 1995 levels in 1997.
Projections indicate that French automotive sales today are still one percent lower than if the subsidy had not been enacted. The study concludes that subsidies have only a temporary positive effect and that the negative effect may have more of an impact.
Source: Jerome Adda and Russell Cooper, "Ballaurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, August 2000.
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