Economics Formative Coursework

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

The main issue that needs to be addressed under the case is the concern of market failure. The growth in cities has pressured urban transportation systems characterized by congestion and delays. The problem has further caused an escalation in health challenges propagated by the adverse effects of the unsustainable transport system. The primary argument is on the poor allocation of merit goods and the inefficient allocation of resources resulting in negative externalities, which require appropriate solutions.

Failure by Urban Transport Systems to Deliver Efficient Market

Market failure occurs once the market needs to provide an adequate quantity of a product to meet the demand in the market or what is provided is inferior quality. There are four main market failure types: public goods, monopoly, externality, and information asymmetry. Market failure is denoted by a high level of inefficiency or poor allocation of resources as a result of the shortcomings of the market (Gillespie, 2019). As a result, the market becomes chaotic since individual decisions cannot result in the good of the public resulting in negative externalities.

Figure 1: Market Failure and Negative Externalities

Figure 1 above visualizes the problem of market failure involving the public transport system. The diagram indicates that point A is the equilibrium point where the supply equals market demand; at this point, MPB = MPC. However, when the supply goes down, the supply curve shifts to the left such that equilibrium shifts from point A to B. Therefore, a shortfall in supply causes a negative externality since demand cannot go down despite a fall in supply.

The negative externality that affects the transport system gives rise to several challenges leading to the increased preference for private transport, as the public system is ineffective. The trend further introduces health challenges, and the increased emission of greenhouse gases leads to climate change. There is a need for a sustainable transport system to be established to provide a safe system without compromising people’s health and the destruction of the environment.

Policy Option to Ensure Efficient and Sustainable Urban Transport Systems in the Future: Subsidy

Investment in the transport system is capital-intensive and would require the government to develop incentives to attract private involvement to remedy the situation. One critical approach the government can consider is providing incentives, which will bring down the cost of acquiring the equipment needed to attract the public to prefer the public transport system. The government facilitates a subsidy as an advantage to a person, a business entity, or an institution to entice them to participate in providing goods or services for the public good. The government can provide the subsidy directly by giving monetary payments or reducing prices (Gillespie, 2019). An indirect subsidy is provided through various means, including a favorable tax regime, labor benefits, and enhanced welfare programs. The intention is to relieve the investor of the burdens they face in providing goods and services that benefit the general public. They help support market behavior that will result in positive externalities.

Figure 2: Subsidy and Positive Externalities

Figure 2 above shows the reverse of the first diagram due to the introduction of subsidies. The subsidies introduced by the government will support investment that will improve the quality of public transport. The increased supply of public transport services will cause the supply curve to shift from left to right resulting in positive externalities. Therefore, the equilibrium point will shift from C to D.

An example is when the government offers subsidies to private investors in a public rail transport system in a city. The system’s efficiency will attract more users from the public, hence reducing the number of private cars on roads, reducing congestion on the roads, accidents, and pollution due to gas emissions.

Introducing subsidies may attract new entrants, which will increase competition leading to better services following the participation of more players. It will further boost the provision of merit goods that generate positive externalities. On the contrary, subsidies may force the government to divert resources from preference areas to support a few businesses. Gillespie (2019) states that the population may suffer due to a lack of other essential services. Subsidies can distort the market as they involve a monetary gain rather than enhanced efficiency. The government may face challenges in removing the subsidies once people become accustomed to their benefits.

Considering the positive externalities of the solution, the policy should be adopted.

Policy Option to Ensure Efficient and Sustainable Urban Transport Systems in the Future: Odd-Even Rule

The government can consider implementing traffic restrictions based on even-and odd-numbered license plate systems. The system works by setting conditions or specific routes to be used by cars depending on whether they have an odd- or even-numbered number plate. The decision can involve indicating the days when odd-numbered and even-numbered vehicles can use the roads.

Restricting the number of private cars on the roads through the odd-even rule will reduce the number of cars on the public transport system. As a result, there will be a shift in the demand curve from right to left such that the equilibrium shifts from point G to H. Therefore, more people will have to use the public transport system, which means fewer cars on the roads.

The odd-even rule has been applied successfully in India to manage pollution in New Delhi, particularly during Diwali celebrations when the smog increases. However, the government made exceptions for using electric cars and two-wheelers.

The approach helps reduce gas emissions since the number of cars on the road is restricted, thus reducing pollution. In addition, fewer cars on the public transport system reduce congestion and accidents, ensuring the population enjoys a higher quality of life (Gillespie, 2019). However, the policy may inconvenience many people since they would feel that their freedoms are being interfered with by the state. The government can be exposed to activist acts from human rights bodies, including legal action.

The odd-even rule is suitable in modern and organized cities where the public transport system is efficient. We may need a better transport system to be effectively deployed in cities with a poor transport system as it will significantly inconvenience the citizens.

Policy Option to Ensure Efficient and Sustainable Urban Transport Systems in the Future: Subsidize the Use of Clean Energy Sources

The government can create a friendly operating environment by subsidizing sustainable means of transport that involve the use of clean sources of energy, such as electricity.

Figure 4: Impact of Subsidies on Clean Energy Sources

Government subsidies targeting to promote the use of clean energy will boost preference for sustainable means of transport, especially the use of electric cars. The solution will introduce positive externalities since there will be less pollution, reducing the effects of climate change (Gillespie, 2019). As indicated in figure 3 above, an increase in the demand for electric cars will cause the demand curve to shift from left to right; hence the equilibrium will move from E to F.

The United States is among the top countries that produce a vast amount of carbon gas emissions to the environment. The government can subsidize the large-scale use of electric cars, such as from companies like tesla.

The increased use of electric cars will reduce the amount of carbon gas emissions to the environment and ultimately reduce pollution and the effects of climate change. However, the technology is capital-intensive since the production of cars is at an early stage of development, and the necessary infrastructure, including charging points, must be developed.

In the short term, the solution can be avoided as the government supports basic programs that will facilitate implementation in the long run.

Conclusion

In conclusion, the government can consider supporting businesses by providing subsidies to promote the use of renewable energy. Supporting the private sector will create jobs by attracting colossal investment and supporting cities’ better development. Additionally, the government can engage in more than one policy action. For instance, while providing subsidies in one city, the administration can implement travel restrictions in another part of the city where the approach would not cause significant inconveniences and would be more acceptable to the population.

Reference List

Gillespie A.R. (2019) Foundations in Economics. 5^th Ed. Oxford University Press

Click Here To Order Now!