According to the article, people who drive cars enjoy the private benefits of the cars, but this will create external costs for other people. This is commonly referred to as fuel gas, monoxide. Because there is a free market, consumers will maximize their private benefit, ignore the effects on others and consume at the level where MSC=MPB. This means that they will over-consume cars at the output of Q1. It is not producing at the socially efficient output Q*, where the marginal social cost is equal to the marginal social benefit. Since marginal benefit is not equal to marginal cost, it is a welfare loss and so a market failure results.
This situation will not be fixed by a free market because consumers are only concerned with maximizing their profit. So government is expected to correct the market failure, and it has a number of options:
Government can impose indirect taxes on the goods with negative externality. This would be to try and reduce consumption of the goods. After a tax is imposed, the MSC curve shifts upwards.
Price increase from P1 to P2, and consumption falls from Q1 to Q*. Consumption would now reach the socially efficient level and government will receive revenue that it can use to pay for the external cost. However, the inelastic of demand may means taxes do not manage to reduce quantity demanded very much and so, while government revenue is raised, quantity demanded does no fall to socially efficient level. Also, if taxes are raised too much, black market may be caused to start.
Another option is the government can try to educate people about the harmful effects of the good and also fund negative advertising in order to reduce the quantity demanded. Thus the MPB curve would shift to left, towards the MSB curve. This is shown in the diagram above. However, the cost of this may be too high, although if taxes are in place, then the revenue could be used to fund these measures. Also, some people may not have their opinions changes very much.
Alternatively, according to the article, it has been said that big fines can be levied if countries are found to have breached EU law. Also, it could reduce traffic in congested area where PM10 is above EU limits, or target construction work, ships at berth, industrial plants or domestic heating. In addition, low and zero emission vehicles, taxi age limits and a hydrogen-fuelled bus service will be good suggestions.
To sum up, air pollution can be a kind of negative externality of consumption which is created by people when they are consuming goods. However, it can be also a kind of negative externality of production, which is created by producers when they are producing goods. At this time, the firm will produce at the point where the marginal social cost of the production is greater than the marginal private costs. Now we can correct this situation by taxation, banning, legislation, tradable permits or property rights, which also have many problems too.
Here's what a star student thought of this essay
Quality of writing
The most disappointing aspect of this IA will be the grammar and spelling. Although the concepts discussed hold much depth, the presentation needs much improvement to bring across the ideas of the writer. Spelling is bad but not devastating. Similarly, grammar flaws are evident at times but these are not major errors. Definitely, as mentioned above, the IA could be improved by focusing on technical details by defining more economic terms like MSB, MSC, market failure, taxation, revenue as these are details that are often looked out for by markers and since definitions earn easy marks for the writer. Overall, a moderate piece of commentary that needs more economic details and polishing on the grammar and spelling.
Level of analysis
The level of analysis could be improved as there is little depth in analysis though there is adequate breadth of contents. For example, an economics IA should have the economics terms such as MSB, MSC, negative externality, taxation being defined instead of defining irrelevant terms like air pollution. Moreover, the initial part of the essay where the writer explains market failure actually doesnÃ¢â‚¬â„¢t have the keyword of market failure and has no reference to the vey neatly and labeled graph, but this is actually done later on in explaining the effect of taxes. It could be improved by consistent reference to graphs since graphs are what make an economics IA different from other humanities IAs. Here, it must be mentioned that the IA details the biology of air pollution which could be reduced to focus on the mathematics behind the taxation. The focus on revenue generated as well as the downsides of taxation as a measure could have been evaluated to a greater extent, especially since an economics IA needs significant amount of evaluation to score well.
Response to question
The writer has answered the question to a certain extent in grasping the economics behind the situation in describing the market failure due to negative externalities, the policies used in eliminating the market failure as well as hinting at limitations of these policies and giving further recommendations to solve the market failure. After introducing the concept of market failure due to pollution, a form of negative externality, the writer explains what the concept means by putting forward the theory on MSC and MSB. Then, the writer explains the effects of taxation by using the graph well and then provides further policies that could be used as well. Hence, the content of the IA is very well done. However, an IA has a word limit and perhaps the explanation on the biology behind air pollution could be removed to pack in more details on the economics of market failure as the IA is actually an economics commentary, not a Biology IA. While the IA is very focused on the microeconomics features, it could probe into and mention some facets of macroeconomics and developmental economics as well. Most importantly, the idea of allocative inefficiency is missing.