“Concentrated power is not rendered harmless by the good intentions of those who create it.”
- Milton Friedman

Despite the high hopes surrounding the Chevy Volt, General Motors (GM) has only sold about 10,000 this year. Subsequently, Chevrolet has had to abandon its 40,000 vehicle sales forecast (already revised down from 60,000) as it now appears that the Volt will significantly miss sales projections for the second straight year. The problems that have plagued the Chevy Volt are a classic example of good intentions gone awry and how government favoritism is no substitute for economic freedom.

Before production even began, the Chevy Volt was selected as a government favorite and promised generous financial assistance. But, when politicians abandon economic freedom and attempt to override the market and encourage individuals to act in a specific way, the plans usually don’t work as intended.

Unfortunately, we’ve seen this over and over again—with Solyndra, ethanol subsidies and a host of other examples that have led to waste, both seen and unseen.

Ultimately, Consumers Will Decide What’s Best for Them:

Businesses should provide what customers want to buy, not what bureaucrats think is best. People know what they want and choose to spend their hard-earned money accordingly.  Attempts by the government to direct consumption and engage in social engineering distort the information individuals receive, which manipulates their decisions and often results in waste.

In the case of the Chevy Volt, the federal government is trying to increase demand for fuel efficient cars by offering a $7,500 tax credit. Colorado even gives Volt buyers an additional $6,000 on top of the $7,500 federal tax credit. California even gives an additional $1,500 rebate. In total, between $50,000 and $250,000 in incentives and taxpayer dollars goes into the production and sale of each Volt.  Despite this assistance, thousands remain unsold.

Similarly, Solyndra received $535 million from the Department of Energy only to go bankrupt two years later due to lack of demand for expensive and inefficient solar panels.  Consumers tell businesses how valuable their products are by purchasing them. A lack of demand is a message that something needs to change.

Distorting Market Signals:

Despite all the help it receives in the form of tax breaks and subsidies, the Volt is still much more expensive than similar cars and much less popular. In 2011, almost 25 percent fewer Volts were sold than projected. On the other hand, other fuel efficient cars like the Toyota Prius C, which is not eligible for a federal tax credit, were selling so quickly at one point, that dealers had to raise the price by almost $7,000 because demand is so high. This shows that some people do want more fuel efficient cars, but are choosing which cars to buy independent of government incentives.

Because consumers can’t be forced to want a product, producers must be able to see and respond to accurate prices and other market signals, which relay information about consumer demand, in order to determine what and how much to produce.

Grants and subsidies from the government distort the production and sale prices for the Volt and the feedback GM gets from customers. Because of these distortions, it’s difficult to know how much more a Volt would cost without subsidies, but it is likely that if each car cost $7,500 more, fewer customers would purchase one. Instead of getting rewarded by pleased customers purchasing the Volt, GM is rewarded by the government for just producing Volts.

But Wait, There’s More … Unseen Costs

There are also unseen costs to government action that go beyond mere dollars. The taxpayer money given to a chosen few is hard-earned money that taxpayers can no longer use to make their lives better. We can’t see what individuals or businesses would have done with those resources if it wasn’t poured into the government-determined project.

These government interventions also artificially and unfairly give one company an advantage over its competitors. Instead of receiving profits by creating a valuable product and selling it to customers who voluntarily purchase it—as is the case in a free marketplace—the government is rewarding certain companies, products and individuals at the expense of others. This also leads to waste as more goods may be produced than consumers actually want. In the meantime, the same resources could have been used to produce something of greater value.

Conclusion

When government tries to steer consumers into buying certain products or services, it can waste taxpayer money and create distortions, regardless of how well intentioned the policies.  And as we’ve seen, government-directed projects often fail.

Free market projects fail as well. However, one important difference between the two scenarios is that in the free market, individuals voluntarily launch projects to meet consumer wants and needs. In doing so, they assume the risks—and consequences—of failure.  Conversely, when government projects fail, the cost is borne by taxpayers who didn’t know the risks and didn’t voluntarily decide to undertake the project.

In societies with high levels of economic freedom, businesses succeed by using resources wisely to provide a good or service that people value.  Entrepreneurs have the incentive to keep trying, changing, and improving and the successful ones hit the mark on an offering that makes our lives better.