Typically, cars and gas are complements. On the other hand, according to the rules of introductory micro, when gas prices are rising, gas and hybrids are substitutes:
Americans are buying record numbers of hybrid and electric cars as gas prices climb and new models arrive in showrooms, giving the vehicles their greatest share yet of the U.S. auto market.
Consumers bought a record 52,000 gas-electric hybrids and all-electric cars in March, up from 34,000 during the same month last year.
The two categories combined made up 3.64 percent of U.S. sales, their highest monthly market share ever, according to Ward’s AutoInfoBank. The previous high was 3.56 percent in July 2009, when the Cash for Clunkers program encouraged people to trade in old gas guzzlers for more fuel-efficient cars.
I always need convincing … Let's say you are torn between two similarly ranked upscale mid-sized cars: the Chevy Volt and the Volkswagon CC. Something in-between a high end and a stripped down CC costs about $5000 less and delivers 9 MPG less on the highway and 14 MPG less in the city. To keep the math easy, let's say there is a 10 MPG difference. If you drive 12,000 miles per year then you save 1200 gallons per year. If the price of gas is between $3 and $4 per gallon then you save between $500 and $667 each year on gas. All else equal, it only pays to buy the hybird if you expect to keep your car for a long time (10 years at $3/gal, 7.5 years at $4/gal; at a discount rate of zero). Only in the case of a 100% city driver does the hybrid begin to make financial sense. You would need to keep your car for 4.375 years to make the hybrid pay off (at a discount rate of zero).
So, I can understand why someone would buy a hybrid — saving the planet, etc — but I don't fully understand why there are big changes in demand when gas prices rise a bit. Unless, there is a chunk of consumers at the margin eco-friendly margin who only need a small bump in gas prices to get them to go green.
Leave a Reply