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    The government can affect the market for new cars

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    Briefly consider the ways in which governments might influence the market for new cars?

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    The government can affect the market for new cars in many ways. In each case, the key to understanding the economic effects is how the government changes the relatives prices between types of cars. The change in relative prices lead consumers to substitute away from some types of new cars or cars all together.

    First, it may adopt a lemons law that identifies the allowable number of poor quality new cars to be sold. For example, if five percent of the cars sold have been indentified as a lemon, the car producer pays a fine. Similarly, the government may adopt laws that require car ...

    Solution Summary

    How can the government affect the market for new cars?