Question

To deal with smog problem, the local governments in China and India have been known to restrict vehicle use for a few weeks during periods of severe smog problem. One approach used is to allow vehicles to run on streets on alternate days only (for example, even-numbered vehicles on one day and odd-numbered vehicles the next day).

(i) Is this kind of approach an economomically efficient way to get motor-vehicle emissions reduced to a desired/target level in our society ? Explain.
(ii) Suggest how we can use an emission tax policy to reduce motor-vehicle emissions to a desirable level in our society so as to deal with smog problem like mentioned above. Will the emission tax policy be cost-effective?

Answer 1

Introduction-

The problem of pollution across the globe has brought economists close at deciding the social impact which this has on long term productivity and demand and supply within the country. Many economies which are today facing excessive problem of pollution have resorted to techniques such as using odd even techniques or increasing taxes on purchasing conventional fuel vehicles to discourage people from travelling in them and thus helping the environment and the economy at the same time.

In view of the same, the case study and its economic aspects have been described in detail in the sections as follows: -

Answer to Part 1)

If the government requires to reduce pollution, then it needs to spend significant amount of money towards activities such as Afforestation and spraying water to contain the same as much as possible. On the contrary, if the cause of such pollution is in itself eliminated all such costs can be reduced for the government.

Now coming to the economic effectiveness and the costs involved, suppose there is an aggregate demand for transport wherein the total population size is 100 people and all of them want to commute to work. 60 percent of these travel via their own cars while 40 percent use public transport which is only a fraction of polluting component as per research. Now, if the government intervenes and decides that only 50% of those travelling by their own cars would be allowed on a particular day, this would mean that the remaining would have no choice but to use public transport or pool in. The effective ratio would be such that it might be reversed wherein, the number of people using public transport is 70% whereas as per the 50% rule, those using private vehicles is reduced to 30%.

This on one hand would bring additional revenue for the country in terms of additional people seeking public transport on one hand, and on the other the governments expenses on controlling pollution via other methods would significantly reduce as a main source of pollution will be eliminated. Other externalities such as lesser traffic also contribute to the fact that economically this is a good thing to do as it reduces costs for the government as well as increases revenue through maximum use of public transport facilities which bring in money for governments.

Answer to Part 2)

When we use an emission tax policy which increases the cost of a vehicle, those that are consuming such vehicles would be discouraged to purchase them as their income remains fixed. As prices of goods and services go beyond the budget of a lot of users, such cars are discouraged from purchase and no longer remain lucrative for buyers. A price push reduces the demand for such vehicles which cause damage to the environment.

It is a widely popular strategy of imposing taxes and increasing costs of a product which governments follow and through which they reduce costs of those products which are harmful for the society and discourage people from purchasing the same.

Once the product prices are high, people will go for other alternatives such as public transport or clubbing with others for their transport needs which will help the government in increasing their revenue.

Please feel free to ask your doubts in the comments section if any.