Social Costs and Benefits
Externality is a result of carrying out various transactions. Nearly all activities bring about some externality. It can be either positive or negative; positive in that it create additional benefits to the 3rd party, and negative if it harms the 3rd party (Stlouisfed.org, 2018). Negative externalities are the most important factor that raise concerns on the governments’ part. Being that they are negative externalities, it doesn’t mean that they are as a result of carrying out some wrong activities. The problem is that the impacts on the 3rd party may be intense without any compensation by the party causing the negative externality. Most parties’ aim is to maximize revenues; this could be by raising the production of output or raising of prices. Most production activities bring about some certain level of negative externalities mostly on the environmental part (Coyne & Leeson, 2009). The ignorance of the impacts of pollution caused by producers creates a rationale for government intervention (Helbling, 2017). In this paper will shall find out the role played by the government in addressing the externality and how the market would be if the government stayed off the market.
The transportation industry which is the basis for our study on externality is a fast growing industry. Many people are buying vehicles every now and then; be it, private cars, motorcycles, buses, lorries, ships, boats, etc. transportation is important for an economy since people tend to move their services and goods from one place to the other. Therefore, even though they cause negative externality, we don’t expect the government to completely eliminate the presence of these vehicles. What this paper will try to find out is what the government is doing and has to do to minimize the negative externalities. The major are where this paper will rely on in determining the market structure on the transportation industry is that of land transport.
Market failure exist because producers do not cater for all the cost of production, including cost to the third parties (Callan, Callan-Thomas & Thomas, 2007). Producers need to minimize their costs as much as they can and thus there is no incentive to cover for additional costs. Thus, the equilibrium level between producers’ costs and buyers’ benefits is flawed. The externalities involved with transportation industry are; air pollution, noise, congestion and accidents. Aph.gov.au (2018) noted that in 1996, greenhouse gas emissions were described by the Bureau of Transport and Communication Economics (BTCE) in a report Transport and Greenhouse-costs and options for reducing emissions to be an important negative externality from the transportation industry. Further, other negative externality from the transportation industry were noted to be traffic congestion, air pollution and car crashes. Society suffers extra costs from the existence of an externality. An example of such a cost is on health care provision.
The assumption from the society’s perspective is that negative externalities should be reduced to zero for an optimal outcome to be achieved. However, since activities are known to generate social benefits, it would thus be undesirable to have a situation of zero externalities. There less people who can lay down a proposition for banning of cars since they cause congestion and pollutes the air; because the social benefits provided are very essential. Economic theory explains that an externality has a socially optimal level where the Marginal Social Cost (additional costs to society) is equal to the Marginal Social Benefit (additional benefits to society). This forms the starting point in which the policies meant for improving the society’s welfare are implemented; this could be by reducing or increasing the activity level. The theoretical optimal level for greenhouse gases is where the Marginal Costs of abatement is equal to the Marginal Benefit of the abatement. The optimal level is however difficult to determine in the real sense. There are however initiatives that the Australian government has introduced on the transport industry towards reduction of greenhouse gas emissions.
Private Transport
Fig: Negative externality and market failure
Where MSC is Marginal Social Cost, MPC is Marginal Private Cost and MPB is Marginal Private Benefits.
Firms produce Qp units of output when allowed to operate freely without government’s intervention; this is where MPC = MPB. The output is sold at price Pp. the MSC of producing Qp units is very high thus the existence of market failure. If government intervenes, Qs units would be produced, sold at a higher price Ps and MSC is lower at this point. Triangle abc represents the deadweight loss.
Public transport advocates often claim that the social costs of motoring are not paid by the motorists. That is, the only costs paid by motorists for running their cars are only the private costs; they fail to pay for noise and air pollution costs, and also that of congestion. However, taxes and charges are indirect contributions by motorists to the externality costs. Aph.gov.au (2018) noted that the taxes and charged raise from motor vehicles exceeds the road-related expenditure amounts; this is according to Bureau of Infrastructure, Transport and Regional Economics (BITRE). Transportation externalities could be reduced through several means. They include; taxes on fuel, standards of fuel, alternative fuels development, and road-pricing. From the sixteen ways the BTCE examined, there are three ways from which great reductions in transport emissions are achieved. These are; trees planting, petrol carbon tax, and using wood-derived ethanol.
However, when implementing these measure, there are different social costs. There were however some measures that were pointed out to be the most effective. These include; user charges on urban roads, petrol carbon tax, urban commuter parking charges and public transport fares reduction. The existence of Australian and international evidence on the economic, fiscal and environmental impacts of greenhouse gas emissions led to the examination of transportation measures by BITRE in 2002 in a report “Greenhouse policy options for transport”. It found out that greenhouse gas emission could be reduced and at the same time improve efficiency by employing the following measures. They include; road congestion pricing; parking –related distortions elimination (e.g. minimum number of new buildings spaces be regulated and employer-provided spaces be underpriced); conversion from fixed to variable some car use costs; and reduction of vehicle tariffs on passenger vehicles (this is found to encourage investors to take new cars that are more fuel efficient).
It is believed that emissions would be greatly reduced by increased usage of public transport. There are two researches that confirmed this allegation. One is the State of the Environment 2003 report by NSW Environmental Protection Authority which found motor vehicle average efficiency to be half that of rail and buses. The second one is the Warren Center’s report 2002 research which found public transport to be efficient than cars by 2.7 times across the whole day. The question is to how the change in demand for public vehicles would rise if most private car user shifted to public means. The change could be so big such that it would result in a greater increase in trains and buses (the electricity or diesel used on trains is mostly generated from coal and thus fossil fuel usage will rise).
Public Transport
The consequences of a 20%, 40%, 60% and 80% reduction in fares on urban public transport were simulated by the BTCE. In this study, it was found that on normal levels, an 80% reduction on fares in urban public transport, there would be a 12% decline in private cars travel. The overall emissions for both the public and private cars would fall be 4%. This seems to be very insignificant compared to the high percentage reduction on fares. Given the fact that taxpayers subsidizes the public transport since it runs at a loss, free public transport would only increase the budget deficit on public transport. Facilitating for the free fares would force the government to reduced expenditure from other industries and raise it on public transport; this would harm other sectors of the economy. The challenge that exists is that there are many people who would not use the public transportation even if it were made free; thus, the decline in the use of private vehicles would be insignificant to lower the intended negative externalities. In Victoria, it was estimated that there would be only a 30% increase in patronage if public transport was made free and thus was rejected.
Helbling (2017) noted that neoclassical economists considered negative externalities as market failure and thus advocated for government intervention to correct the externality. Taxation was suggested to be the solution to negative externality by making the party causing negative externality accountable for the additional costs of its actions. Carbon tax has been imposed on petrol prices so as to make petrol more expensive and thus discourage its consumption. Riley (2016) noted that carbon tax is commonly used. The other is the hiking of parking fees in the urban areas; this has discourage many private car owners from using their cars and thus to use public means. The other is congestion charges where a congestion fee is charged for the vehicles entering the area determined as congestion area. Consumer protect legislation in Australia requires that vehicles be roadworthy to improve the safety of consumers. There has been a fixation of speed limits for vehicles in Australia and weight limits for Lorries. 80km/h is the restricted price for learner license when alone, 100km/h if with a licensed driving instructor, and 100km/h for provisional license holders (Nt.gov.au, 2017). According to Rms.nsw.gov.au (2018), there are speed limits on specific places on the roads that have to be observed. Regulations have been enacted to limit the amount of alcohol a driver should consume and drive; the drink drive limit in Australia is set at 0.05 Blood Alcohol Concentration (BAC) (Police.wa.gov.au, 2018).
Fig: Pigouvious tax (Internalizing negative externality)
The imposition of Pigouvious tax will shift the production curve for the industry from MPC to MPC + Tax. From this action, the government will raise tax revenue equal to d,e,a,Ps. The deadweight loss will be abe. There will be a reduction of quantity from Qp to Qs which is the socially optimal level.
The government should differentiate the public and the private means of transportation for its policies to work best. Public means bring about efficiency in the market since a single vehicle can get many people to their destinations (let’s consider people boarding a bus to go to work in town); this is compared to that single owner of private car still going to the same town. Thus in this case, I may argue that public means should be encouraged at the expense of private means. The government could place a petrol price cap to all public vehicles and at the same time fix the charges made on the consumers such that there will be no incentive for hiking the prices. Somehow private cars will decline since some private car owners will shift to public means.
Further, a carbon tax would not be much effective. What I would recommend is for the government to subsidize the acquisition of vehicles that are more fuel efficient, by doing this, the consumption of petrol will fall and the emissions will be reduced. This could also be used as a policy mix together with the carbon tax. The mix would be efficient in that those with more efficient vehicles will be spending less than the normal cars and thus the owner of the normal cars will be discouraged from using the cars that cost them much in terms of fuel and in the long run, the use of more fuel efficient cars will be high. The government can also impose a legislation for the manufacturing of only more fuel efficient vehicles and if a vehicle is imported, it also has to possess the same standard. Since vehicles ware out after some years, and people buy new vehicles every day, eventually in some years to come, only fuel efficient vehicles will operate in Australia.
The market structures in every nation are classified into four groups which possess distinct characteristics; perfect competitive market, monopolistic markets, oligopoly markets and the monopolistic markets. The difference between the four market structures is on; number of sellers, the nature of the goods, entry and exit barriers, nature of competition, chances of price discrimination and the size of profit made in the long run. The perfect competition is not applicable in the modern economics but still similar goods are sold in the market where if one buyer raise the price, the customers buys from another seller who is selling at a lower price. Also, it’s very uncommon for the existence on monopoly markets because the fact that they have a high tendency of exploiting consumers through their market power and thus are acquired by the government.
Perfect Competitive Markets
In this market structure,
- The buyers are many as well as the sellers.
- Completely there are not barriers to entry or exit
- All the sellers sell similar product that is not differentiated.
- The price offered in the market is determined by demand and supply.
- Normal profit is earned in the long run.
- There is no opportunity for price discrimination.
Monopolistic Market Structures
In this market structure,
- Firms are small but selling to large number of buyers.
- The sellers are selling differentiated products (products are differentiated by prices, quality and high brand value).
- There is non-price competition
- There is imperfect competition
- Entry and exit is free
- Normal profit is earned in the long run.
Oligopoly Market Structures
In this market structure,
- The firms are few but the buyers are large in number.
- Firms are more interdependent
- The few firms have captured a large market share and thus there exist entry and exit barriers.
- There is requirement for huge investment (firm’s products and services always get innovated to attract more customers and thus increase the market share).
- The demand curve for this market in the long run is kinked.
- Firms have market power
Monopoly Market Structures
In this market structure,
- A single firm sellers to all the buyers in the market.
- The seller makes the prices free from the market.
- The products or services offered are unique and with no substitutes.
- The barriers for entry are high.
- High chances of discriminating prices.
- Profit maximization
The Australian transportation industry operates under the oligopoly market structure. This is derived from the fact that there are 3000 bus operators who are to serve many millions of consumers (Bic.asn.au, 2014). Traffic services have no specific forms. The process of producing and consuming traffic services is unique. The services are not storable and cannot be realized on other markets. There are many buses but are owned by few operators.
Brook (2017) argued that vehicles pollute the environment more when the slow down and then accelerate again, thus lower speed limits are not efficient in controlling externality. It is only worsening the situation. Since the social economic value of the transportation industry is not achieved, this industry fails to have allocative efficiency and thus not efficient. The prices are set by the operating companies and thus are not determined by the market as for perfect competition case.
Conclusion
It is not possible to do away with the industry creating negative externality because there are still many benefits from the industry. Some certain level of negative externality should be allowed in the economy since complete elimination of externality would create big costs on the producers’ part and would discourage production which again would not be good for the economy. Carbon tax is less effective as it has to be very big to discourage consumption. Furthermore, the impact is expected on the reduction on the number of users but not the consumption of fuel by the existing motorists since vehicles will still need the same amount of fuel to travel the usual distance. Thus it could be ineffective if the discouraged consumers are fewer. The consumers are the most likely to suffer from the carbon tax since vehicles owners will shift the tax burden by hiking fares and charges for goods transportation.
Aph.gov.au. (2018). Transportation. Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Browse_by_Topic/ClimateChangeold/effects/economic/onTransportation.
Bic.asn.au. (2014). Bus Industry Vital Statistics. Retrieved from https://bic.asn.au/information-for-moving-people/bus-industry-vital-statistics.
Brook, B. (2017). Could reducing top speeds on Australian motorways actually make traffic go faster? Retrieved from https://www.news.com.au/technology/innovation/motoring/could-reducing-top-speeds-on-australian-motorways-actually-make-traffic-go-faster/news-story/048a1b4462ffb48d4dda53d19f8910d4.
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Coyne, C. J., & Leeson, P. T. (2009). Media, development and institutional change. Cheltenham: E. Elgar.
Helbling, T. (2017). Externalities: Prices Do Not Capture All Costs. Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/external.htm.
Nt.gov.au. (2017). Speed limits – NT.GOV.AU. Retrieved from https://nt.gov.au/driving/safety/speed-limits.
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Police.wa.gov.au. (2018). Drink driving. Retrieved from https://www.police.wa.gov.au/Traffic/Offences/Drink-driving.
OECD Publishing. & Organisation for Economic Co-operation and Development Staff. (2006). OECD Economic Surveys: Australia – Volume 2006 Issue 12. Paris: Organisation for Economic Co-operation and Development.
Riley, G. (2016). Negative Externalities and Government Intervention. Retrieved from https://www.tutor2u.net/economics/reference/negative-externalities-and-government-intervention.
Rms.nsw.gov.au. (2018). Speed limits for heavy vehicles. Retrieved from https://www.rms.nsw.gov.au/roads/safety-rules/road-rules/heavy-vehicles/speed-limits.html.
Stlouisfed.org. (2018). Externalities – The Economic Lowdown Podcast Series, Episode 11. Retrieved from https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-11-externalities.
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