Using the data and your economic knowledge, evaluate the economic case for and
against government intervention in car markets.
Markets are generally thought to work well. Changes in the relative prices of goods serve to create signals and incentives to which firms and consumers respond, allocating resources to where they produce the most utility.
I These principles can easily be applied to car markets. At the time of the extracts, for example, there was a large drop in the market for new cars, especially luxury ones, due to the global economic downturn. New cars are a normal good, such as a decline in income sees a fall in demand for them. More than that, they are likely to be income elastic, with demand falling more than proportionately in response to any fall in income. This is because consumers can keep their existing cars for longer, or turn to public transport, in order to spend more of their limited income on necessities during difficult periods. This effect was reinforced during the economic downturn by a lack of availability of credit with which to finance car purchases. It is part of the way that markets work to allocate resources that the excess supply created should put downward pressure on price, reducing the price of cars relative to other goods, and also reducing the profit margin on each car supplied for a given cost of production. This incentivises producers to cut back on car production, with resultant job losses in the industry.