In this blog post, I will show off work by one of my former students from their real exam. This particular student received an A in A-Level Economics and he achieved 92 out of 100 across the four essays of Papers 1, 2 and 3 in the 2023 exam diet.
This particular essay received a 23 out of 25.
What the candidate did particularly well was to show off the combinatorial diagrams he'd studied with me (which in turn indicated to the examiner he was an A* candidate). He also hit all the key analysis points that examiners like to see (curve, equilibrium, welfare areas, etc).
Unfortunately for the economics profession, this particular student decided to become an Architect instead! Our loss is their gain :)
Q8: Using 2021 estimates of carbon emissions, it is estimated that a petrol car journey from London to Glasgow emits approximately 3.3 times more Carbon Dioxide per passenger than equivalent journeys by train.
Evaluate possible methods of government intervention to reduce carbon emissions caused by road transport in the UK.
Government intervention is when government steps into the market and acts as a regulator to prevent market failure. This can be achieved by the government implementing taxes and subsidies, price controls or information campaigns to resolve information gaps.
Reducing carbon emissions is very important as they are a cause of global warming.
One way government intervention can reduce carbon emissions caused by road transport in the UK is implementing a tax on carbon emitting cars. One example of this is the ULEZ zone in central parts of London (extending out to the M25). This is a penalty on driving a carbon emitting car in the centre of London and is an attempt to reduce the consumption of carbon emitting vehicles and to reduce the external cost of operating these vehicles. This is shown in diagram 1.
The effect of the tax is evidenced from the upward shift of supply from S1 to "S1 + tax". This results in an increase in price from P1 to P2, and a decrease in the quantity demanded from Q1 to Q2. This causes a reduction in the social welfare loss area ABC, as there is a shift from the free market equilibrium to the social optimum. This demonstrates that the government can apply taxes to carbon emitting cars such as petrol and diesel, which results in decreased consumption and therefore a reduction in the social welfare loss of carbon emitting cars.
However, the implementation of such a tax can result in a deadweight loss - as shown by the area GHI. This means that there is a loss for businesses that operate within a ULEZ zone, as they may experience an increase in their costs as a result of the tax. This demonstrates that the emissions-reducing tax may also crease negative impacts for businesses and therefore a number of businesses may exit the market as a result of generating losses.
Another way government intervention can reduce the amount of carbon emissions on the road is by taxing the producers of carbon emitting vehicles. This forces them to reduce the production of these vehicles and therefore reduces the amount of carbon emitting vehicles on the road. An example of this is the increase in the level of corporation tax implemented recently by the government from 19% to 25%. This increase in tax results in an increase in the costs to a business which leads in to a reduction of quantity demanded.
This is shown by Diagram 2.
There is an increase in costs due to the tax from AC1 to AC2 (and MC1 to MC2), which leads to the reduction in quantity from Q1 to Q2. This leads to a reduction in social welfare loss as the tax has prevented overproduction and therefore reduced the number of carbon emitting vehicles on the road.
However, in the UK there are a large number of zombie firms. In 2010, 10% of all firms in the UK were zombie firms, and in 2019, 20% of all firms were zombie firms. This means that a firm is just making enough profit to cover its debt interest payments or some of its costs but not all. An increase in Corporation Tax for these firms may result in marginal firms exiting the market. This leads to an increase in market share for firms that survive, and therefore, it could result in a change in market structure from monopolistically competitive to oligopolistic. This reduction in competition could be disadvantageous to both consumers and the government, as the firms may collude. The tax might also create a black market for carbon emitting cars, which means the tax wouldn't reduce the number of vehicles on the road by as much, while still affecting businesses' costs.
Another way government intervention can reduce the amount of carbon emissions on the road is by subsidising the production of clean energy vehicles. An example of a subsidy is when governments subsidised farmers to prevent UK farms from going into administration during a COVID pandemic. Subsidising electric vehicles would reduce the costs of production for said vehicles, thus reducing price and increasing the quantity demanded. This is shown in Diagram 3.
This shows that a subsidy shifts the supply curve out from S1 to S2. This results in an increase in the quantity demanded of goods with positive externalities such as electric vehicles, which leads to an increase in the consumption of electric vehicles. This reduces the social welfare loss of area ABC. It also leads to a reduction of carbon emitting firms on the road and also an increase in the amount of green energy vehicles on the road.
However, in the current climate, the UK can't accommodate everyone having an electric vehicle and it would have to result in an increase in the number of charging stations. This increases demand for electricity, which increases carbon emissions. This shows that while the subsidy would reduce carbon emissions on the road, there would be an increase in emissions from power stations instead. Subsidies are also highly expensive, as evidenced on diagram 3, with area P1, E, G, F showing the government cost of subsidy, This means that there might not be an immediate effect of the subsidy as firms will be investing in new kinds of technology to reduce their costs and increase production.
Overall, the government can reduce carbon emissions caused by road transport in the UK but this has unintended consequences on other sectors of the economy and on carbon emissions produced in other industries. This also depends on the level of development in the country. In highly-developed country such as the UK, these forms of government intervention are likely to be effective and efficient. In a less-developed country, high levels of corruption (government failure) and black markets may mean that interventions are likely to cause more damage than repair.
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