The growth in energy demand and economic growth have resulted in a substantial increase in air pollution and global emissions. For instance, the emission of carbon dioxide in the year 2000 represented 18 percent of the total use of fossil fuels, while in 2013; the value had risen to 20%. Currently, there are rising concerns about global warming attributed to increased emission of greenhouse gases such as carbon dioxide, ozone, Nitrous oxide, and water vapor. Vast of the air pollution is linked to industrial effluents and car emissions. It is estimated that by the year 2035, the levels of carbon dioxide in the atmosphere will have risen to 535 ppm; consequently, raising the global temperature by 2 degrees. Based on this statistics, it is evident that air pollution that is caused by the emission of exhaust gases from engines of automobiles presents a major economic problem.
The concept of “economic problem” is used to describe a situation in the economy that is based on the widespread scholarly belief that there only exist scarce and finite resources to satisfy the desires and needs of all human beings. It is founded on the philosophy that though there are endless (unlimited) human needs, there are limited resources that can be used to satisfy them. Since the concept of demand is ever-changing, the initial provisions of the model of economic problem arise. This is in part determined by the constantly changing population demographics. In this regard, the methods to curbing this economic problem revolve around the model of choice in the course of establishing priority over which wants and needs are supposed to be fulfilled as soon as possible and the things that are supposed to be produced for the economy.
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"Vehicle Air Pollution as an Economic Problem".
The fundamental economic problem features in the sense of how to develop initiatives that would help in meeting the wants and needs of human beings. In other words, how can these scarce resources be allocated while reflecting an economy’s capacity to produce various goods and services? This brings about another concept called the Opportunity Cost. This is the loss that is experienced as a result of potential benefit if another action would have been taken. People make choices on a daily basis because there are limited resources to satisfy unlimited wants. Consequently, every choice entails giving up something, thus the notion of opportunity cost.
A negative externality describes the loss that third-party experiences as a result of an economic transaction by another party. As such, every economic transaction has a consumer and producer who are regarded as second and first parties respectively. The third parties are entities, individuals, and groups who are affected indirectly. Based on the above argument, air pollution features as a negative externality because it imposes external costs on people who are classified as third parties to the transaction. Air pollution is a negative externality that results in overexploitation in the wake of less defined property rights with respect to the atmosphere which is regarded as a public good.
As a result, economists cannot rely on the free market to solve this economic problem since a free market is where the prices are determined by competition that is unregulated and unrestricted. It means that in a free market, governments are not able to force pollutants to provide a form of compensation to the people who are indirectly affected by the exhaust emissions. Also, in a free market, both the producer and consumer tend to behave in a rational manner and think of themselves only (of their private benefits and costs). Thereby, the producers of automobiles tend to extend negative externalities to the public.
Imperatively, the emission of carbon dioxide is higher in petrol than in diesel cars. This means that the degree of a negative externality that third parties accrue from diesel cars is relatively less than that experienced from petrol cars. If the government was able to compel producers of automobiles to offer a form of compensation to the public, those dealing with petrol cars would be liable to higher payment than the others.
As mentioned earlier, a negative externality refers to the cost that a third party accrues as a result of an economic transaction being committed by a first party towards a second party. They are also known as spillover effects, whereas a negative externality is also called an external cost. Externalities are most common where there are no well-defined property rights that could be instrumental in governing the allocation of assets or resources.
Free market equilibrium refers to a situation whereby the rate of demand is equal to that of supply. On the other hand, Social optimum takes place when the marginal social benefit (MSB) intersects with the marginal social cost (MSC). The two concepts are different in that a positive externality tends to shift the demand/supply curve outwards, whereas a negative externality will shift it inwards. As such, in the absence of an externality, it is rational to conclude that the private is equal to the social and the S/D curve remains the same.
Figure 2. Graph Illustrating the Petrol/relationship.
In the case that the private costs or benefits are different from the social costs or benefits in a substantial manner, then there is the need to redraw the S/D curve. The original intersection is the free market equilibrium while the new one is the social optimum. Consequently, the vertical distance between the two curves illustrates the externality.
There are different methods that can be used to solve the problem of air pollution. Firstly, indirect taxation would make producers more responsible, thus they would tend to adopt possible measures of reducing air pollution. For instance, manufacturing environment-friendly vehicles. Taxation also enables the government to have a source of revenue. The funds can be used to finance possible ways of controlling pollution. One disadvantage is that the poor would be made to pay for the economic transaction of producers of automobiles. Economically, one way of making the less privileged to participate in paying taxes is through indirect taxation. The situation would undermine their welfare and socioeconomic development. In addition, indirect taxation would lead to a higher cost of production, an extra burden that would be passed over to the consumers.
With respect to subsidies, governments can provide alternatives such as solar power that can be used in place of coal. The government can provide this alternative by making the former more affordable, more competitive, and promote its development. The disadvantage is that it is consistent with environment preservation initiatives. One disadvantage of this method is that firms may take advantage of this extra profit generating mechanism and keep the excess benefits to themselves.
From the main argument, it seems that there is a statistical relationship between air pollution and inefficiencies in the economy. This is because air pollution reflects a substantial negative externality in the production process, thereby making the cost of producing goods and services to be more expensive. Imperatively, it becomes rational to develop possible approaches that can be used to control it. Introducing indirect taxes seems the most effective way since it would skyrocket the cost of production and offer an incentive for producers of automobiles to adapt ways of controlling air pollution. It is good to know that a free market economy cannot solve the problem of air pollution unless the government intervenes and compel industrialists and regulators in a formal way to develop possible mechanisms. Though the provision of subsidies is somewhat effective, it places so much power in the hands of air polluters since they will be left with extra revenue. This is a risk because the extra funds can be used to purchase more equipment that would tend to promote additional air pollution in the environment.
In conclusion, air pollution that results from vehicle emissions is an economic problem since it qualifies as a negative externality that imposes a cost on different people who are not direct parties to the act of pollution. To solve this economic problem, taxes or subsidies may be used with an objective of encouraging public transport and consequently, reducing the number of private vehicles on the road. With the increasing concern regarding global warming, reducing air pollution resulting from vehicle emissions will go a long way in fostering environmental conservation.
