Question

Consider an analysis of changes in safety regulations for US automobiles.

The net impact in the primary market is a loss of $25 billion per year, measured using actual prices and quantities before and after the change (i.e. not holding other prices constant).

The change in regulations effected the US tire market, reducing consumption by 200K, but price did not change appreciably.

The change in regulations effected the US gasoline market. The price of gasoline fell from $2.10 per gallon to $2.00, with both prices including a $0.5 per gallon tax. Annual gasoline consumption fell 20 billion gallons.

There is an external cost of $1 per gallon of gasoline.

What is the net benefit of the new regulations? Explain your reasoning.

Answer 1

Policy: Safety regulations in US automobiles

Net Impacts:

# Primary Market = Loss by $ 25 billion/ year

# US Tire Market = Consumption has reduced by 200k but not the price

If the average price change for a Tire is $2

Total change in US tire market = - 200000 * 2 = - $ 400000

# US Gasoline Market = Price and Quantity has changed

Price Change = $0.10 / gallon

Quantity Change = fell by 20 Billion gallon / year

According to EIA (2020) the annual gasoline consumption in US was 142.71 billion gallon

Total Change in Gasoline Market => Total sales after policy - Total sales before policy

= (122.71 *2) - (142.71 *2.10) = - $ 54.27 Billion / year

# External Cost = $1 per Gallon of gasoline

Total external cost = $ 122.71 billion / year

External cost will be applied whether there is a policy change or not, hence it should not be included into the calculations.

However, there is a benefit by reduced consumption = External cost before - external cost after = 142.71 - 122.71 = $20 billion per year

# Net Benefit

= Primary Market + Total change in US tire market + Total Change in Gasoline Market + Total external cost

= - 25 billion - 400000 - 54.27 Billion + 20 billion = - $ 59.27 billion / year.

Net benefit of new regulation is a loss by $ 59.27 billion / year.

The new regulation had a negative impact on the primary market, tire industry and gasoline sales. However, it had reduced the external cost incurred in automobile sector. The new regulation may have hit the industry negatively but it might be an initial blow. The actual impact should be studied after 3-5 years. However, an initial policy tweakings should be done with the immediate results.