French Policy to Phase Out Petrol and Diesel Vehicles - Samples

Question: Discuss about the Understanding the French Policy to Phase Out Petrol and Diesel Vehicles. Answer: Introduction President Macron announced in July that France will phase out its petrol and diesel vehicles by the year 2040. This announcement comes shortly after the Paris Climate Agreement was signed, to which France is a signatory. This paper examines climate change as a market failure and discusses the effectiveness of this policy in addressing this market failure. This paper also addresses another form of market failure fossil-fuel subsidy. The policy is also discussed in the contet of sunsidies. Market Failure A market failure is a situation when the market mechanism fails to capture all the costs of producing economic goods.(Stern 2007) A market failure implies that a market is not functioning efficiently. The policy described in the article has been announced to deal with the failure called climate change. This a domestic policy intervention by France so that France can fulfil its commitment towards the Paris Accord. Climate change has been described as a market failure because the economic systems do not account for the harmful effects or negative externalities of climate change.(Stern 2007) Petrol and diesel vehicles emit Green House Gases (GHG) and these emissions have externalities in the form of climate change. Climate change entails extreme weathers, global warming and more. Arrow calculated the economic costs of climate change and concluded that the world is better off investing in new climate friendly technologies and mitigation efforts since the benefits of such investment outwe igh its costs.(Arrow 2007) Countries measure economic growth without accounting for the negative externalities of climate change to the environment and public health and consequently, the costs are borne by the society in the form of the costs relating to natural disasters, healthcare costs etc.(Stern 2007) Negative externalities or diseconomies are mathematically represented as a (negative) deviation of Marginal Private Cost (MPC) from the Marginal Social Cost. According to Lipsey Chrystal, (2011) Private costs are those costs that are incurred by parties that are involved directly in the Economic activity and Social costs are those costs that are borne by the society Hence, Marginal Private Costs refer to the private producers cost of the last producing the last unit produced or providing services to the last consumer serviced. Producers will only price goods according to willingness to pay of consumers. Hence, the responsibility of negative externalities can also, be transferred to consumers. The Marginal Social Cost is a valuation of the impact borne by the society in the production of the last unit of good or services. Negative externalities decrease the social good i.e. they have harmful effects or cause inconvenience to the public, in general. (Lipsey and Chrystal 2011). The dia gram given below depicts negative externalities and the loss of social good resulting from the externalities produced by petrol and diesel cars. The Marginal Private Costs in are the cost of producing the cars. The deadweight loss is the difference between the two.(Riley 2005). The loss of social good is the loss of efficiency and this loss of efficiency is calculated a deadweight loss. Climate change is a result of market failure since the producers of negative externalities do no bear the full costs and policy intervention is required to correct the possible harmful effects of climate change. If countries were made to face the negatives effects of climate change proportionate to their carbon emissions, then it would be the ideal response to the problem as countries would have acted to reduce their emissions.(Stern 2007) Some of such policy interventions include carbon pricing and emissions trading. (Arrow, 2007) In the given example, policy change has been used to seek technological intervention i.e. it is hoped that by phasing out inefficient technology and replacing it with more efficient technology, the market failure of climate change can be corrected. In this context, more efficient technology would imply any technology that can replace the vehicles with considerably fewer emissions. For example, electric combustion run vehicles or electric cars are considere d to be more carbon efficient.(Chrisafis Vaughan, 2017) The prime reason for the existence of policy levers such as carbon pricing is that they provide an impetus to technological innovations to reduce the social costs of climate change. France has pledged to reduce its carbon emissions.(United Nations Framework Convention For Climate Change 2017) Climate and these policy interventions drive the market to pay for the social costs or impose checks (caps) on the negative externalities that result from economic activity. Additionally, they provide structures so that those activities that cause these social diseconomies or negative externalities would compensate for it. (Samuelson and Nordhaus 2004) Another form of market failure in this example is the subsidies given for fossil fuels, here petrol and diesel.(Stern 2007) Fossil fuels can also be considered as market failures since the costs of subsidies are borne by tax payers who may or may not avail subsidies in equal amount of their consumption of petrol and diesel. The Impact and Effectiveness of the Policy The policy intervention announced related to investment in a new technology(United Nations Framework Convention For Climate Change 2017) i.e. electric vehicles to replace the older technology i.e. petrol and diesel run vehicles. However, petrol and diesel run vehicles are not just goods but products that a part of the automotive industry with varied allied markets. Key among them are the market for fossil fuels and electric car. Effects on Other Markets a) Effects on Complementary Goods: Petrol and diesel are complementary goods to petrol and diesel combustion vehicles.(Gravelle and Rees 2005) Hence, the reduction in demand and supply of such vehicles will cause a decrease in demand for petrol and diesel itself. As the demand for petrol and diesel decreases, the negative externalities of petrol and diesel (i.e. externalities pertaining to Green House Gas Emissions and externalities pertaining to subsidies) will decrease. This will lead to high social benefits which may off set the additional costs, if any, that the society may incur due to the introduction of the new technology.In the diagram below, the demand for fossil fuels (here taken exclusively as Petrol and Diesel) is assessed, given the demand for Petrol and diesel cars. b) Impact on Electric Car Market Commercial car owners can produce cars by varying the engine of the car. (Chrisafis Vaughan, 2017) Consumer can choose between the petrol and diesel cars and electric cars. i.e petrol and diesel combustion engines and electric combustion engines are substitutes.(Gravelle and Rees 2005) As the demand for electric engine vehicles increases, their average costs will hopefully reduce and the prices of electric vehicles and petrol and diesel run vehicles will begin to converge. As the average costs reduce, the price will reduce too, thereby increasing the demand for electric vehicles further. In the diagram below, it is assumed that future consumers will either choose from the petrol or electric vehicle. The diagram depicts the cross elasticity of demand between electric vehicles and fossil fuel run vehicles.