Question

1. How do externalities drive the U.S. and E.U. automotive markets respectively?

2. Why would someone use the Coase Theorem to minimize the impact of externalities?

3. What recommendations would you have for reducing externalities in the U.S. automotive market?

4. How may price discrimination play a role in achieving carbon emission reduction?

Answer 1

1. The externalities of automobiles, similarly to other economic externalities, are the measurable difference in costs for other parties to those of the car proprietor, such costs are not taken into account when the proprietor opts to drive their car. According to the Harvard University the main externalities of driving are local and global pollution, oil dependence, traffic congestion and traffic accidents; while according to a meta-study conducted by the Delft University these externalities are congestion and scarcity costs, accident costs, air pollution costs, noise costs, climate change costs, costs for nature and landscape, costs for water pollution, costs for soil pollution and costs of energy dependency.

While the existence of negative externalities seem consensual, the existence of positive externalities of the automobile does not have consensus amongst economists and experts in the transportation sector. The creation of jobs or the fact that the related industries pay taxes, cannot be considered, as such, as positive externalities, because any legal economic activity pays taxes, and the big majority also needs job demand. Time saving to the driver, and therefore eventually more personal production, cannot either be considered a positive externality, because the driver has already taken those factors into account when they opted to use their car, and therefore these factors cannot be considered, by many authors, a pure externality.

Accessibility and Land Value

Notwithstanding the above objections, some authors enumerate positive externalities for the automobile like accessibility and land value. Where land is expensive, it is developed more intensively. Where it is more intensively developed, there are more activities and destinations that can be reached in a given time. Where there are more activities, accessibility is higher and where accessibility is higher, land is more expensive.

However observations show that less car dependent forms of development produce denser settlement patterns and higher land values.

City Growth

Economists have sought to understand why cities grow and why large cities seem to be at an advantage relative to others. One explanation that has received much attention emphasizes the role of agglomeration economies in facilitating and sustaining city growth. The clustering of firms and workers in cities generates positive externalities by allowing for labor market pooling, input sharing, and knowledge spillovers

Nevertheless some other economists mention urban decay and urban sprawl as a negative effect or cost of the automobile, when the city grows due to automobile dependency

2. Private actors will sometimes effectively address externalities and reach efficient outcomes without government intervention.

The Coase theorem, which was developed by Ronald Coase, posits that two parties will be able to bargain with each other to reach an agreement that efficiently addresses externalities. However, the theorem notes several conditions in order for such a solution to occur, including low transaction costs (the costs the parties incur by negotiating and coming to agreement) and well-defined property rights. If the conditions are met, the bargaining parties are expected to reach an agreement where everyone is better off. In practice, however, transaction costs do exist, and the bargaining process does not always run smoothly. As a result, private individuals often fail to resolve problems.

The Coase theorem states that private parties can find efficient solutions to externalities without government intervention.

3. Pollution Taxes

One common approach to adjust for externalities is to tax those who create negative externalities.

This is known as "making the polluter pay".

Introducing a tax increases the private cost of consumption or production and ought to reduce demand and output for the good that is creating the externality.

Some economists argue that the revenue from pollution taxes should be 'ring-fenced' and allocated to projects that protect or enhance our environment.

The government can intervene in a market using regulations and laws. For example, the Health and Safety at Work Act covers all public and private sector businesses. Local Councils can take action against noisy, unruly neighbours and can pass by-laws preventing the public consumption of alcohol. The British government introduced a ban on smoking in public places from July 2007. The European Union has introduced directives on how consumer durables such as cars, batteries, fridges freezers and other products should be disposed of. The onus is now on producers to provide facilities for consumers to bring back their unwanted products.

4. Putting a price on carbon emissions can drive efficient emission reductions, spur innovation and allow businesses and households to choose how they reduce emissions. It means that clean technologies and practices can compete on a more equal playing field with fossil fuels or other GHG-emitting technologies. Expanding carbon pricing to more places, along with fossil fuel subsidy reform, are essential to accelerating the low-carbon transition. If designed and implemented effectively, carbon pricing can also achieve broader sustainable development benefits and reduce economic inequalities. By creating new sources of public finance, carbon pricing initiatives can enable government investments in critical public priorities like healthcare, education or infrastructure. Alternatively, revenue can be returned directly to citizens through tax cuts or rebates. Or the revenue could be used for a combination of these measures. By using these measures to support the poor or other groups who are disproportionately affected by structural changes associated with the low-carbon transition, carbon pricing systems can be a powerful tool for supporting a just transition.