Economics Assignment: Economic Analysis of France's Vehicle Ban Policy

This economics assignment examines the economic implications of France's policy to ban petrol and diesel vehicles by 2040. It begins by introducing the context of global warming and the role of fossil fuels, framing the policy as a response to environmental concerns. The essay then delves into the economic concept of market failure, specifically focusing on negative externalities arising from pollution caused by petrol and diesel vehicles. It uses a supply and demand model to illustrate the social costs associated with these externalities. The assignment explores the remedies for market failure, including government intervention and the Coase Theorem, and discusses the expected effects of the ban on related markets, such as the automotive industry, considering shifts in demand for both polluting and eco-friendly vehicles. The analysis concludes that the ban is a commendable step toward a pollution-free environment but is also expected to have significant economic consequences both domestically and globally. The paper is a valuable resource for students studying economics, providing an in-depth analysis of the economic effects of environmental policies.

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Economics Assignment
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Author Note

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Introduction
Global warming has been one of the issues of pertaining debates and concerns among the
environmentalists, policy-makers and governing authorities across the globe, since the last
century. With the advent of the Industrial Revolution the problem has aggravated even more as
the uncontrolled industrial activities went on increasing, thereby causing considerable adverse
effects on the global environment. Over the years, lack of awareness, clubbed with tremendous
urbanization and globalization led to substantial usage of petrol, diesel and other non-renewable
fossil-fuels, which in its turn added to the burden of global carbon emission and the resulting rise
in the temperature of world (Trenberth and Fasullo 2013). In the recent times, understanding the
adversity of this phenomenon, many countries are trying to take reform measures to combat and
mitigate the magnitude of the problem. The essay takes into account the policy announced by
France, to ban all the petrol and diesel driven cars by 2040 and assuming the policy to be enacted
tries to look from the economic point of view, the market failure which is subjected to by this
policy. It also discusses about the possible effects of this ban on the related industries, using the
economic concepts of demand and supply (Independent.co.uk 2017).
Banning policy announced by France
The above discussed policy to ban diesel and petrol vehicles, as announced by the new
environment minister of the country, falls under the cluster of reform measures that targets to
make the country entirely carbon neutral by the end of 2050. Together, these policies, as thought
by the governing authority, can be considered as commendable on part of the country’s policy-
makers as these in the long run shows potential to efficiently target the ever-persisting grave

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issues of environmental degradation, pollution and global warming. Being a part of the
commitments made by the country in the Paris Agreement, this plan also includes the
termination of palm oil imports from any part of the world as the same also significantly
contributes to a massive level of deforestations in many parts of the world.
This policy, if enacted appropriately, may have huge implications on the country and the
world as a whole, not only in the environmental perspective but also in many other aspects. In
terms of economics, the need for this policy can be explained in terms of the concept of market
failure, which the policy is expected to target (Dolfsma 2013). This is explained in the following
section.
Market Failure and negative externalities
In terms of economics, a market failure can be defined as the situation, which arises when
there is inefficiency in allocation of the scarce resources across the economy, such that there
remain opportunities to make some people better off without making any other person worse off.
This in its turn, often gives rise to a linked situation of negative externality in the market
(Keohane and Olmstead 2016).
The term externality, in economics, means the effect (positive or negative) which is
experienced by some individual, due to the occurrence of a transaction, in which he or she is not
directly involved. In this context, negative externality can be referred to as the cost, which the
individual, being a third party, incurs, without being directly participating in the transaction
(Rezai, Foley and Taylor 2016).

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Market Failure in Pollution:
This aspect of market failure takes into account the unfair burden of costs, which arises
from the production of goods, and services, which involves emission of pollutants in the
atmosphere, thereby decreasing the overall welfare of the society as a whole. In the concerned
scenario, the excessive usage of petrol and diesel driven cars gives rise to a similar kind of
situation (Naudé 2013).
The non-renewable fossil fuels like petrol and diesel are sources of huge carbon and
green house emission following combustion. The usages of these in the vehicles, therefore,
increases the carbon content in the atmosphere, significantly, which form a part of the trace
gases, the latter having the characteristics of absorbing heat in low frequencies. This in turn,
leads to an overall increase in the temperature of the global atmosphere, which in other words is
known as Global Warming and has huge negative implications on the overall global welfare and
also poses as a credible threat to human existence (Lehmann 2012). Therefore, it can be seen that
the cost of using petrol and driven cars are higher than the private cost of the users of these cars
as it also includes a huge social cost, which can be shown with the help of the following
diagram:

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Figure 1: Negative externalities in Pollution
(Source: As created by the author)
As can be seen from the above figure, the equilibrium in the free market occurs at the
point where the marginal private cost is equal to the marginal benefit that is at the point A, with
the equilibrium output being Q and the price being P. However, as the commodity here is fossil
fuel, the marginal social cost of using the same, is higher than that of the marginal private cost as
it also involves the loss of welfare of the third party individuals in the society as a whole who are
not directly involved in this usage of petrol and diesel. Therefore, in this scenario, there is a loss
of welfare in the society, of amount CAB (Tietenberg and Lewis 2016).

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If the socially acceptable output has to be taken into account, then the point of production
will be B, where the marginal social cost equated the marginal benefits. As can be seen from the
above diagram, the output, in this case, reduces to Q1 and price increases to P1.
The policy, as announced by France, plans to decrease the usage of fossil fuel to socially
optimal level by implementing the ban on the petrol and diesel vehicles (Carraro, Katsoulacos
and Xepapadeas 2013).
Remedies for market failure
In general the policies targeted to reduce negative externalities include agreements
between the parties involved or the intervention of the government, which taxes the parties
creating negative externalities and subsidizes those are adversely affected by the same, according
to the Coase Theorem. In this scenario, the government of France has designed policies of
premiums for the poorer section of households, which will help them exchanging their vehicles
for cleaner ones. The producers of these vehicles are expected to experience the taxing burden in
the form of loss of sales with the implementation of the policy, which thereby abides by the
Coase Theorem (Chipman and Tian 2012).
Effects on ban on related markets
The petrol and diesel driven cars being the backbone of transport in any country,
imposing a ban on them, implies a huge paradigm shift in the transport industry of the country,
thereby affecting the overall productivity of the economy significantly. Robust and cost effective
alternatives need to be developed and implemented, as more or less every industry of an
economy is related to the transport infrastructure of that economy (Ostrom et al. 2012).

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In this scenario, the imposition of a ban on the petrol and diesel vehicles will hamper the
industry of petrol and diesel vehicle, in the international scenario, adversely as they will suffer
from a severe fall in the demand:
Figure 2: Fall in demand for petrol and diesel vehicles
(Source: As created by the author)
Figure 2 shows the reduction in the overall demand of petrol and diesel vehicles, that the
industry in the global scenario is expected to face due to the imposition of the ban as has been
proposed by the Government of France.
On the other hand, with the recent awareness generation regarding the adverse effects of
fossil fuels, many automobile companies are coming up with innovations in this field. They are
emphasizing on electricity and other renewable sources for their vehicles. Some of the pioneers

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in this field are Tesla, BMW and others. The government of many countries are also introducing
eco-friendly public transports which are made by different companies in order to address this
issue. Therefore, the ban on the petrol and the diesel vehicles by France, is expected to increase
the demand for eco-friendly cars both by the private households as well as government as the ban
is expected to increase the usage of public transports.
Figure 3: Increase in demand for vehicles using renewable fuel resources
(Source: As created by the author)
The ban can therefore, increase the overall demand for eco-friendly transports
significantly, which, as can be seen from the above figure, can attract new players in the market
and also can influence the old suppliers to change the nature of their vehicles from polluting ones
to eco-friendly ones, thereby strengthening the eco-friendly transport industry (Tacconi 2012).

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Conclusion
It can be concluded from the above discussion that the ban on petrol and diesel vehicles,
as has been announced by the French Government, being a commendable step towards achieving
pollution free environment, also is expected to have significant implications on the economic
scenario of the country as well. The policy targets to reduce the market failure, which arises in
case of pollution, which creates huge social costs over the marginal private costs and leads to
negative externalities. As can be seen from the above discussion, the policy, if enacted properly,
can lead to significant shift in the global transport industry (both positive and negative), which in
turn can affect the economic scenario of the country itself and the global economic scenario as a
whole.

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References
Carraro, Carlo, Yiannis Katsoulacos, and Anastasios Xepapadeas, eds. Environmental policy and
market structure. Vol. 4. Springer Science & Business Media, 2013.
Chipman, John S., and Guoqiang Tian. "Detrimental externalities, pollution rights, and the
“Coase Theorem”." Economic Theory 49, no. 2 (2012): 309-327.
Dolfsma, Wilfred. Government failure: Society, markets and rules. Edward Elgar Publishing,
2013.
Independent.co.uk, Chloe. 2017. "France Is Banning All Petrol And Diesel Vehicles". The
Independent. http://www.independent.co.uk/environment/france-petrol-diesel-ban-vehicles-cars-
2040-a7826831.html.
Keohane, Nathaniel O., and Sheila M. Olmstead. "Introduction." In Markets and the
Environment, pp. 1-10. Island Press/Center for Resource Economics, 2016.
Lehmann, Paul. "Justifying a policy mix for pollution control: a review of economic
literature." Journal of Economic Surveys 26, no. 1 (2012): 71-97.
Naudé, Wim. "Entrepreneurship and economic development: Theory, evidence and
policy." Browser Download This Paper(2013).
Ostrom, Elinor, Christina Chang, Mark Pennington, and Vlad Tarko. "The Future of the
Commons-Beyond Market Failure and Government Regulation." (2012).

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Rezai, Armon, Duncan K. Foley, and Lance Taylor. "Global warming and economic
externalities." In The Economics of the Global Environment, pp. 447-470. Springer International
Publishing, 2016.
Tacconi, Luca. "Redefining payments for environmental services." Ecological Economics 73
(2012): 29-36.
Tietenberg, Thomas H., and Lynne Lewis. Environmental and natural resource economics.
Routledge, 2016.
Trenberth, Kevin E., and John T. Fasullo. "An apparent hiatus in global warming?." Earth's
Future 1, no. 1 (2013): 19-32.