Negative Externalities and Policy Options: Metropia’s Air Pollution Crisis

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:

  1. 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.
  2. 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.
  3. Promoting Electric Vehicles (EVs): Offering tax incentives for purchasing EVs and investing in EV infrastructure to reduce reliance on fossil fuels.
  4. Implementing Congestion Charging: Charging drivers for using certain congested roads during peak hours to discourage unnecessary use and reduce traffic congestion.

Questions for Students

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Policy Implementation and Challenges: Discuss the practical challenges in implementing these policies in Metropia, considering factors like political feasibility, economic impact, and public response.