Question # 2 [10] Elasticity Estimates for Policy Options to Reduce Air Pollutio
ID: 1115586 • Letter: Q
Question
Question # 2 [10] Elasticity Estimates for Policy Options to Reduce Air Pollution Emissions from Motor Vehicles Elasticity of Fuel consumption with respect to fuel price Vehicle travel with respect to fuel price Vehicle trips with respect to parking fees New vehicle purchases with respect to new vehicle price-0.6 to -0.87 Own price Estimate RangeElasticity Type -0.18 to -1.0 Own price -0.1 to -0.26 Cross price 0.05 to -0.30 Cross price Using the elasticity data from above, choose one policy to reduce air pollutants from motor vehicles and show how effective it would be. Use economic arguments to support your answer.Explanation / Answer
As per the given data of elasticity, it is the own elasticity of demand of fuel that causes the maximum impact of -1 in terms of elsticity.
It means that the % increase in the price of fuel will cause an equal % decrease in the demand for fuel. Hence, the fuel consumption will come down and it will lead to the reduction in the release of air pollutants. Hence, the price of the fuel can be increased. It can be done by adopting a policy of applying a social tax or tax to reduce the consumption of the fuel.
It can be justified by applying a concept of negative externality. When there is no tax, then price is low and consumption high, because the private cost is lower the social cost. It sets a market equilibrium. Though, it creates harm to the environment and negative externality is created. Due to this reason, the government can implement a Pigouvian tax that will drive the supply curve to the leftward direction. As a result, the price of the fuel will increase, output will come down and socially optimal equilibrium will be established. At this level of price and output,
Marginal social cost = Marginal social benefit
Hence, with this policy, the release of the air pollutants will decrease as the fuel consumption will come down with the rise in fuel price.