Incentives to reduce pollution

The UK is considering a scheme to help remove diesel cars from the roads. This is after years of encouraging diesel fuelled cars by taxing it more favourably than petrol.

The reason for this scheme is that it is now considered that diesel fuel is more polluting than petrol. This is especially true of older diesel engines (mainly an ageing thing I think). The negative externalities of consumption associated with diesel are now thought to be more severe than previously thought (indeed it was thought diesel was better than petrol for the environment because less was needed to travel the same distance).

The proposal might be called a 'nudge' by behavioural economists, because they don't really understand subsidies! This scheme proposes to give a minimum payment, in excess of the market value of old diesel vehicles, to incentivise people to trade in their old vehicle for a brand new one. The new vehicles will emit less pollution and there is therefore a win for the environment as the market moves closer to allocative efficiency.

The scheme will effectively shift the demand curve for new vehicles to the right with the price difference between what the consumer is prepared to pay and the price they must pay covered by the government. Not everyone will trade in their diesel cars and vans, but some will and this will help efforts to reduce harmful pollution.

There is an interesting benefit for car and van manufacturers of course, they sell more new vehicles and so there will be a boost to Aggregate Demand and employment. The benefits will go to all manufacturers, not just those in the UK and so a Europe wide scheme would make the most sense.

The Daily Express covers the story here

This article has most relevance to IB who look at market failure in more detail than VCE. It is, however, a useful example of how governments can intervene in markets to improve resource allocation for everyone. Please note the Daily Express is not the only paper to cover this and I'd never recommend it as a serious newspaper generally, but I thought the Guardian and BBC deserved a rest.

Sugar tax in Australia

The sugar tax is a rich topic for IA's in microeconomics. Australia is now starting discussions at State and Federal level on the possibility of introducing one. Look out for possible articles on this and save them up!

An example from the SMH here

Effects of the UK sugar tax

The article below is not suitable itself for an IA. However it makes important points about the effectiveness of the proposed UK sugar tax that would be useful material to help analyse any sugar tax or anti-obeisity measure.

Therefore very useful for those revising their IA's or the 2017 year 11's.

The BBC article is here

UK Sugar Tax

Much has been written on the sugar tax in this blog. The article below is posted to allow those in the 2017 Year 11 cohort to have a chance to use in their microeconomics IA. Remember all articles must be less than a year old at the time of writing.

The BBC cover the sugar tax here

Australian Sugar tax

This post is really a marker for those who will be undertaking Year 11 IB in 2017.

The sugar tax has been a topic of discussion in many countries in the last year. The Grattan Institute has issued a report and the Green party have drafted legislation on an Australian sugar tax. As discussed in previous posts it is a good idea as it helps deal with a negative externality of consumption.

Deputy Prime Minister Barnaby Joyce has called the tax 'Bonkers mad'. Takes one to know one.

The ABC covers the story here

An IA article must not be more than twelve months old when the commentary is written. Previous articles and taxes highlighted on the blog will be out of date for the 2017 Year 11 cohort, but not this!

Road pricing in Melbourne - excellent idea

Infrastructure Victoria today issued a 200+ page interim report on future transport infrastructure planning in Melbourne. There is much in it that makes sense, including a cost-benefit analysis report showing which projects will yield more benefits than costs.

One of their proposals (and it is only an option) is to charge motorists $5 to enter the CBD. The aim is to reduce congestion by making people time their journeys differently and to move others on to public transport. The report suggests that 20% of journeys taking between 7am and 9am could be moved to other times.

This proposal is founded on the experience of many other cities. London, Singapore and Stockholm all have well developed charging schemes, although they are not all the same. London charges one amount between 7am and 6pm while Singapore varies the charge according to the time of day and level of congestion.

Road pricing schemes are highly effective when combined with other measures, such as improved public transport and subsidies of that system, park and ride schemes, car sharing schemes and high car parking charges for example. Without additional measures the price elasticity of demand is too inelastic for road pricing to make a significant difference, due to the essential nature of transport generally and the sheer convenience of driving your own vehicle.

Both major parties in Victoria rejected the proposed charges on the morning the report was published. So much for well considered long-term policy making. I have sent a letter!

The Age covers the story here

The ABC coverage is here

This article has some relevance to VCE as it deals with market failure (the negative externalities of using a car and congesting a road) and the price mechanism. IB students are much better equipped to investigate this topic using their knowledge of market failure and policy. (Good EE topic?)

A small charge for plastic shopping bags leads to massive fall.

England introduced a 5p (about 10c) charge for plastic bags in supermarkets. After six months there has been up to a 90% fall in plastic bags used.

The motive is to reduce negative externalities of consumption which have led to market failure. Not only were the bags unnecessarily up scarce resources, they are made from oil so there are negative externalities associated with production too. Also the disposal of the bags has to be in landfill because they cannot be recycled.

This example is an excellent one of regulation (it's not a tax) that internalises the externality. People are forced to consider the costs of the resources used by the imposition of a price. The PED is actually very difficult to determine as the price was originally zero, however we might at this stage suggest that there has been a highly elastic response!

The story is covered here

This is a great example for IB students and for VCE students it also illustrates the effect of using prices to correct market failure. It is unusual as it is a regulation rather than  tax, but clearly a 5p tax would have the same effect (while raising virtually no money).

South Australia places 15% tax on gambling

Australia is unusual among developed countries, it does not tax gamblers. This is unusual for two reasons, firstly gambling is a demerit good, and secondly Australians gamble a lot and it is unusual for a government not to take advantage of taxing a popular activity.

Statistically Australians are the worst gamblers in the world. The chart below shows this.

The problem with gambling is that it represents a market failure because gambling is a demerit good and an imperfect information good.

Gambling is a demerit good because:

The actions of the gambler affect third parties, such as their families. This is a negative externality of consumption.

The result of gambling can place costs on others to help gamblers rehabilitate.

Therefore there are negative external costs associated with gambling.

Gambling is an imperfect information good because gamblers rarely understand the full effects of their actions on themselves. They gamble because they hope to win  in a system where the odds are designed to ensure overall gamblers loose. While short term gains are possible over time gamblers loose in aggregate.

The market situation is shown in the diagram below.

The idea of taxing gambling is therefore a good one. Taxes will move a market towards the social optimum (MSB = MSC at Qopt in the diagram.)

The real question is, will the South Australian tax work to solve the market failure? Will those who gamble realize that the price of betting has risen? Is the demand for gambling going to prove so inelastic that there is little change in behaviour (it is an addiction). Also will taxing the firms in this way simply lower profits of bookmakers rather than affect individual behaviour.

The ABC cover the story here

Another sugar tax

Very sorry I have no time to write posts at the moment. Here is a post on another eample of a sugar tax, called a 'soda tax' as it is the USA.

The BBC article is here