An article published in The Wall Street Journal discussed the recent release of
Ford Motor Company documents containing confidential information about the
technology they have to make their trucks more environmentally friendly. This article
shows an example of tradeoffs. The release of these documents has shown Ford Motor
Company’s ability to make their trucks more fuel-efficient, despite the fact that they have
avoided meeting higher C.A.F.E. standards for the past couple of years. The documents
contain plans for diesel engines and hydrogen-fueled engines. The tradeoff for Ford
Motor Company is the decision of how they want their team of engineers to spend their
time. The more time that the engineers spend working on fuel efficiency, the less time
they can spend making other improvements. Ford engineers are paid on salary and it is
up to the company to decide what they want their engineers to improve on their trucks.
The production possibilities frontier shows that as the production of cars with better fuel
efficiency increases, the production of cars with good acceleration (or any other good
quality) decreases. There is a tradeoff for Ford and they must decide what is going to
interest the consumer the most.
Ford Motor Company has to spend more money to make these fuel-efficient
trucks, so they will have to charge more for the new models. If they make new trucks,
they can advertise that they get better gas mileage and meet higher environmental
standards, but the consumer will be faced with the decision of whether or not to initially
spend more on a fuel-efficient vehicle. This tradeoff for the consumer is what Ford must
examine before they build their new trucks. Eventually C.A.F.E. standards will force
Ford to make more fuel-efficient vehicles, but for the moment they are staying with their
older designs. People who are shopping for vehicles in the auto market care about fuel
efficiency, but are not necessarily willing to pay a whole lot more for a more fuelefficient vehicle. The tradeoff for the customer is either initially spending more money
on a truck with the technology to give him/her better gas mileage and fewer emissions, or
paying less money for a truck and having to spend more money on gasoline in the future.
Ford is thinking at the margin because they know that these environmentally friendly
trucks may not be successful until consumers really care about the price of gasoline.
There are people who do pay special attention to fuel efficiency and emissions, but the
majority of people do not care enough to spend a much larger sum of money. The
marginal benefit for making new vehicles is not greater than the marginal cost. There
will be greater benefits when the E.P.A. begins to push C.A.F.E. standards and Ford has
the plans ready before all of the other motor companies.
Another issue this article relates to is competitive advantage. These documents
were the private property of Ford Motor Company, and the release of this proprietary
information has jeopardized the incentive Ford had to keep these documents confidential.
Prior to the release of these documents over the Internet, Ford, along with many other car
companies, claimed that they needed more time to meet C.A.F.E. standards. The release
of these documents has not only embarrassed Ford, but also taken away their competitive
advantage in the truck market.
This article also concerns the principle of incentives from the consumer’s point of
view. Recently, there has been an increase in the price of gasoline. Americans who are
currently shopping for automobiles may be more concerned with the fuel efficiency of a
car than usual because of this increase. However, in the long run, the price of gas in
America is much cheaper than it is in other countries, such as England, so people do not
care as much about fuel efficiency as they might in other countries. Increasing the fuel
efficiency in the trucks may not be enough of an incentive for car shoppers to pay the
higher prices that will come with the new technology.
The last principle that this article points out is that the government can sometimes
improve market outcomes.
In this case, the E.P.A. wants Ford to make more
environmentally friendly automobiles. C.A.F.E. is a set of standards that exists to force
auto makers to design cars that will not use as much fuel and have less emissions. If this
organization did not exist, Ford could continue to build vehicles that are not
environmentally friendly and not have to take account for the externality of pollution.
This article focuses on two environmental issues. The first is the allocation of
natural resources, in this case petroleum, and the second is air pollution. When looking at
these environmental issues, it is apparent that there are many other factors that affect the
final decisions of policy makers.
Just by looking at this very small aspect of
environmental economics, there was discussion of tradeoffs, thinking at the margin,
incentives, and the improvement of the market by the government.