Objective: The goal of this activity is to enable IB Economics students to understand and critically analyze the concept of negative externalities, using the real-world context of Metropia’s air pollution crisis
Case study: Metropia, a sprawling urban city, is grappling with severe air pollution, a significant negative externality. The primary source of this pollution is the city’s heavy reliance on fossil fuel-powered vehicles. These vehicles release harmful pollutants, including nitrogen oxides and particulate matter, leading to health issues such as respiratory diseases, which the healthcare system estimates cost around $500 million annually. Additionally, traffic congestion causes an estimated loss of 2 million working hours per year, severely impacting productivity.
The government of Metropia is considering several policies to mitigate this issue:
- Imposing a Carbon Tax: A tax on fossil fuels aimed at internalizing the external costs of pollution, encouraging drivers to reduce usage or switch to cleaner alternatives.
- Investing in Public Transportation: Expanding and subsidizing public transport to provide a viable alternative to private vehicle use, thus reducing the number of vehicles on the road.
- Promoting Electric Vehicles (EVs): Offering tax incentives for purchasing EVs and investing in EV infrastructure to reduce reliance on fossil fuels.
- Implementing Congestion Charging: Charging drivers for using certain congested roads during peak hours to discourage unnecessary use and reduce traffic congestion.
Questions for Students
- Negative Externality Diagram: Construct a diagram illustrating the market for fossil fuel-powered vehicles in Metropia, highlighting the divergence between private and social costs, and identifying the welfare loss.
- Positive Externality Diagram: Construct a diagram illustrating the the market for underconsumed electric vehicles, highlighting the divergence between private and social benefits, and identifying the potential welfare gain.
- Impact Analysis: Analyze the short-run and long-run impacts of air pollution in Metropia on public health and the economy. Discuss how these impacts might be represented in changes to your diagram over time.
- Policy Evaluation: Critically evaluate the proposed government policies for their effectiveness in addressing the negative externality of air pollution. Consider the potential benefits and drawbacks of each policy.
- Policy Implementation and Challenges: Discuss the practical challenges in implementing these policies in Metropia, considering factors like political feasibility, economic impact, and public response.