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Bus 171 Study on Economic Assignment

   

Added on  2020-05-08

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Running head: ECONOMIC ASSIGNMENT Economic AssignmentName of the StudentName of the UniversityAuthor note
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1ECONOMIC ASSIGNMENTIntroductionIn today’s world, there is increasing concern for mitigating air pollution. One majorfactor contributing to the growing air pollution is the smoke emitted from burning of petrol anddiesel in vehicles. To counter air pollution, countries around the world are taking steps to reducecarbon emission. France has announced to ban use of diesel and petrol vehicle by 2040. ThePolicy is initiated to address public health concern. Pollution entails negative externality and thusleads market failure. The concept of market failure is analyzed using microeconomic frameworkand concept of efficiency. To fulfill the objective of banning petrol and diesel vehiclesgovernment of France incentivizes household for using alternative theses vehicles such aselectric car or plug in hybrid vehicles. Apart from its direct impact on petrol and diesel car,market the policy likely to affect non-petrol and diesel car market as well. This is evaluatedusing the concept substitute and complementary good. Externality and Market failureMarket failure signifies a situation where market alone cannot ensure efficient outcome.This is likely to be happened in the presence of any external factor that leads to a discrepancybetween social and private benefits and costs. Externality is the event when agents not directly orindirectly included in any activity but still affected from that activity and this is not included inevaluation of the activity (Nicholson and Snyder 2014). There are two types of externalities thatare found to be present. One is positive externality and another is negative externality. In timesof positive externality, social benefit exceeds that of private benefits. In the presence of negativeexternality, social cost exceeds private cost. Both leads to an inefficient market outcome andgovernment policy intervention are needed to correct the inefficiency.
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2ECONOMIC ASSIGNMENTThe essay points to the ban of petrol and diesel vehicle by 2040. The smoke emittedfrom burning of fossils fuels in petrol and diesel run vehicles comprises harmful gases. Thissmokes when mixes with atmosphere then pollute the air. People who breathe the air fell ill. Thisimposes a social cost that its users or producers do not account. Here social cost is greater thanprivate marginal cost. This situation is described in the following figure.Figure 1: Negative externality and market failure(Source: as created by Author)The figure above describes the how the presence of a negative externality leads to an inefficientmarket outcome. Demand curve represents marginal social benefit while the supply curverepresents marginal private cost. In presence of pollution, marginal social cost lies above themarginal private cost curve (Baumol and Blinder 2015). Market outcome is obtained at the
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3ECONOMIC ASSIGNMENTintersection of marginal social benefit curve and private marginal cost curve. Correspondingmarket price and quantity are P* and Q* respectively. However, efficient outcome is that whichis obtained from intersection of marginal social cost and marginal social benefit. Efficientquantity is Qe and efficient price is Pe. With negative externality and market failure, the marketproduces more than the optimum quantity. To address the issue of market failure and to correct the negative externality governmentintervention is required. The environment ministry in France has taken an extreme step andannounces for a ban in the use of petrol and diesel by 2040. Obvious impact of this policy is onthe car manufacturer and put pressure on them by banning the use of diesel and petrol vehicles.However, current market research points that they the current projects of these manufacturerswill help to stand on this promise (Klier and Linn 2015). In order to make the banning projectsuccessful, the plan incorporates of providing subsidy premium to poor household so that theycan easily replace their pollutant vehicles with clean alternatives. As a part of this plan, Francehas also decided to restrict the use of coals for producing electricity. This further includes aninvestment of €4bn to increase energy efficiency. All these are undertaken to maintain leadershipof France in the changing climate policy. The policy will affect daily lives of people in France.Prior to France, Norway and Netherland was announced for banning use of Petrol and diesel runvehicles by 2025. Indian and Germany have announced to go for a similar policy by 2030onwards (theguardian.com 2017). The policy of banning petrol and diesel vehicles followed immediately with theannouncement of Volvo to manufacture only electric cars. Banning of these vehicles is likely tohave a severe impact on the sales of current car manufacturer in France. Though it would create atough condition for car manufacturer but the ministry has belief that the industry is well
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