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Pollution, Externalities and Policy
Instruments to tackle pollutionHaripriya Gundimeda
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All economic activities either impinge on or are affectedby natural and environmental resources.
Activities such as extraction, processing, manufacturing,transport, consumption and disposal not only change thestock of natural resources, but also add stress to the
environmental system besides adding waste toenvironment.
A countrys environmental resources = f(structure of itseconomy, production technologies in use and
environmental policies).While some problems may be associated with lack of
development (e.g., inadequate sanitation &cleandrinking water), others are exacerbated by growth ofeconomic activity (e.g., air and water pollution).
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Environmental degradation is usually aggravated bydevelopment that typically occur as countriesindustrialize:
Growing cities, increasing traffic, rapid economicdevelopment and industrial growth, all of which are
closely associated with higher energy consumption, whichoften leads to degradation.
In the case of India, against an economic growth of 163%in past 20 years, the pollution load increased by more than
475%.During the period from 1975 to 1995 industrial pollution
grew by 247%, whereas vehicular pollution load shot upphenomenally by 650%.
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Unit 1975c 1995c %
growth
GDPa R s .
Millions
104,9680 276,1320 163
V e h i c u l a r
Pollution Loadb
M e t r i c
tons
771,610
(57.3)5789630
(74.4)
650
I n d u s t r i a l
Pollution Loadb
M e t r i c
tons
575,081
(42.7)1995636
(25.6)
247
Total Pollution
Load
M e t r i c
tons
1346,691 7785,266 478
Source: Anonymous (1999), When Wealth is not Health in Down to Earth, Vol. 7, No. 17, Jan. 31: 32-40.
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None of the rivers in India is meeting the desiredquality standards and in the past six years the
situation has hardly changed.
In fact in some of the polluted rivers likeSabarmati, Tapi, Ganga and Godavari, theviolation of standards was observed close to over
90 per cent of the sites monitored.
Since rivers are sink for agriculture run-offs andmunicipal waste also, the violation of standards
cannot be entirely attributed to industrial pollution.
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The data indicates that in many rivers sayGanga in UP, Yamuna in Delhi, Damodar,Subarnerakha, Betwa, Noyyal, Bhavani etc.industries contribute most to the waterpollution.
Though industrial pollution may account forless than 25% of the pollution load in most ofthe rivers, the kind of effluent wastegenerated by industries makes the rivershighly toxic e.g. in Ganges, Yamuna etc.(SOE, 1999: 100).
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Effluent Generation by few large
industries in Damodar Basin
Unit Quantity (million Kl/day)
% contribution
IISCO cold rolling mill and coke oven
plant
29,523 59.00
Durgapur Projects Ltd. 14,000 27.98
Hindustan Steel 4,730 9.45
Philips Carbon Black 1,600 3.19
Carew & Co. 150 0.29
Jamadoba Washry 18 0.04
Chandrapur Thermal 12 0.02
India Explosives Ltd. 4 0.01
Total 50,038 100.00
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Why pollution occurs?
Environment a public good Lack of well defined property rights for
environment
Market failure Externalities
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Externalities are an unintended (anduncompensated) side effects of one persons or
firms activities on another.
Examples:
1) Health effect of smoke emissions from vehicles
in Chennai, Delhi
2) Health effect of smoke emissions from
Indraprastha Thermal power plant in Delhi3) Health effect of discharging untreated effluent
from SSIs in Delhi.
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Because of interdependence in production or
consumption.
The utility of individual i depends not only on his
consumption but also on the consumption of
another individual:
Ui = Ui(Xi, Xj) & Pi = Pi(Xi, Xj)
NOTES: A) These damages are unintentionalper
se as they are typically difficult to avoid.B) This interdependence must also be a non-market
dependence to qualify as an externality.
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1) Congestion caused by a vehicle on other drivers
- unintentional and difficult to avoid.
2) Air Pollution caused by power plants
- unintentional and difficult to avoid
3) If many people are in queue to buy water or medicine
this may lead to in price.
Can this be Called as EXTERNALITY?
No it is perpetuated through market mechanism.
Hence not an external effect.
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This approach supposes that ownership rights or
markets are missing for the particular resource.
Example: If there were private ownership of air,
then people would have to buy the
right to pollute it with smoke.
If ownership rights of a citys air (e.g., Delhi or
Chennai or Kanpur etc.) is given to (or owned by)few individuals and then vehicle owners will have
to pay to these individuals to pollute.
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Two Types:
1) Depletable
2) Non-depletable
Manure from horse is depletable. Because ifone person takes, other cannot.
Odour of Manure is non-depletable. Becauseexposure of one does not reduce exposure ofother individuals.
#(Vehicular air pollution or Odour from Solidwaste are non-depletable)
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Two Types of COSTS:
1) Private Costs2) Social Costs
Ex. - w.r.t. Vehicular Air pollution in Delhi/Chennai
Private Costs - Cost of Owning a vehicle, Fuel(petrol/diesel/LPG), maintenance cost etc.
Social Costs - Effect of pollutant on other people,
my vehicle causing congestion forothers + Private costs.
When SOCIAL COSTS > Private Costs
Negative Externality
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Traffic Volume
To Ta
Demand
Marginal
Private Costs
Marginal Social
CostsCosts,Benefits
Pa
Po
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Examples of Negative Externality
1) Pollution of Ganges or Yamuna byupstream activities
2) Transboundary Pollution
3) Soil Erosion caused by excessive
and type of agriculture4) Floods caused by Deforestation
5) Garbage (NIMBY)
6) Use of pesticides in agriculture -affecting downstream water bodies
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Positive Externalities:When Social Benefit > Private Benefit
Examples of Positive Externality
1) R&D by a firm for Cancer / SARS drug
2) New filter for cars to reduce emissions
3) Forestation in hilly regions affectingwater supply in the plains.
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Since Social Costs are more than Private Costs - if
the persons causing social costs are asked to bearpart of the social costs (i.e., their contribution of
social costs), this externality problem will be solved.
i.e., Internalising the Externality
HOW DO WE Internalise the externality?
Using Policy INSTRUMENTS (CAC, EI/MBI or
Suasive)
In case of Vehicular Pollution - By asking them to
switch to cleaner fuel (Diesel run - buses in Delhi
to CNG or - Vikram to electricity run Safa in KM)
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Standard externality argument provides theanswer.
#If polluters are forced to pay thisenvironmental cost also, this would internalisethe externality.
For example: if users of polluting transport areforced to pay an amount equivalent to the
environmental cost, it will result in cleanervehicles and smaller traffic volume and hencereduced air pollution.
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Traditionally, environmental regulationinstruments are classified according toHow much pollution to abate?Need for regulator to monitor emissions
Former category is concerned with CAC and MBI.The latter involves Direct and Indirect instruments.
#Direct instruments are emission standards,emission fees and market permits; and
#Indirect instruments are environmental taxes,technology standards etc.
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3 Types - Command and Control (CAC) or
Environmental Regulations
Market based instruments (MBI / EI)creating marketsusing existing markets
Engaging the Public / Involving Participation
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Number of criteria -Static Cost Efficiency Is the PI least costly from
firms point of view?
Dynamic Cost Efficiency (AC/t) Does it giveadequate incentive to a firm to
continuously innovate so as to pollution?
Goal Fulfillment Will the PI fulfill the goal forwhich it is intended? e.g., mercury reduction
Administrative Costs What will be theadministrative costs of implementing?
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Criteria contd. -Barrier to Entry Will the implementation of PI
create barriers for entry of new firms
e.g., standards are usually for newer firms/units,thereby protecting older plants.
Older vehicles not covered under EURO II norms.Polluter Pays Principle Is the polluter paying for
the externality?Politics of Implementation (Acceptability) Is it
acceptable to all the parties concerned?
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Technology and
Standard
specifications
Licenses and
Registration
Legislation
Taxes
SubsidiesCharges
Trading schemes
Voluntary agreements
Informative measures
Command and control Market based
Clear outcomes
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Flexibility inregulating complex
environmental processesGreater certainty inhow much pollution
will result from regulation
Simplifying monitoringof compliance witha regulation
High Information costsReduced incentives to find betterWays to control pollutionWeak incentives for innovationDifficulty in satisfyingequimarginal principle
Polluter pays only for pollutionControl and not the residual damagefrom the pollution that is still
emitted after controls are in place
Advantages Limitations
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Informational requirementsare less significant
Provides an incentive for aPolluter to innovateInvolve polluter paying forControl costs and damage
Can be applied widely(even with SMEs)
Least cost solutionFlexibility to make improvementwhen & where necessary
Equimarginal principle holds
TaxA blunt instrument & may result inmodest environmental improvementDoes not guarantee an environmentaloutcome
Long lead times & high rates may beneeded before prices affect behavior
Tradable permits
ComplexityAnticompetitive behaviorLess suitable for smaller firms
Advantages Limitations
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All these problems Overall Failure. Situation not specific to India - Common to other
developing countries e.g., Philippines, Indonesia
Failure of formal regulation Fresh thinking Information disclosure & rating as the tool
for industrial pollution control
Third wave of environmental policy (Tietenberg,1998)
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Can achieve higherCommitment from the parties
Involved than an imposedRequirement
Can be good for negotiatingEnhancements above a
legislative minimum
Can secure earlybuy-in-before formalregulation is required
Not usually appropriate
for managing serious risks
For sectors dominated by SMEsMay be required to set up the
agreement
Significant difficulties incommunication & enforcement
Unlikely to be successfulunless effective penalties
are in place to deal with
under performance
Advantages Disadvantages
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Informative measures
Flexible tools which canbe developed to address
Issues as they arise
Programs may involveTwo-way communications
Resulting in sharing of
Knowledge between firms
and the regulator
Best ways to influencethe behavior of SMEs
To be effective programsMay require substantialResources
Initiative can raiseexpectations of the input
by the regulator
Advantages Disadvantages
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Applicability of instruments
Command and control
Applicable for a wide range of environmental objectivesparticularly suited to address localised issues such as air, water
and ground water pollution and controlling noise and odour
Required to underpin other instruments such as trading and voluntaryagreements to backstop prevent free riders
Trading schemes also require regulatory regimes to describeAnd prescribe the boundaries and mechanisms of operation
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Most appropriate where the targetsector can switch to alternative, readilyavailable, less polluting practices or
goodsWorks best when relatively modest
price signals will have a significantimpact on the market
When simple broadly applicable rulescan be applied avoiding multipleexemptions, discounts or special
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Trading schemes -
applicability Appropriate where there is a range of options
to achieve environmental improvement at arange of costs so that operators are able tochoose the best option for their situation
Most suitable for environmental objectivesthat are global in impact such as GHGs
Schemes require the traded item to bemeasurable
This allows the validation of initial allocationsand subsequently reported data
Trading is effective where there is highliquidity
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Most suitable in industries where a smallnumber of relatively major companies with theability to deliver performance agree toachieve a small number of clearly identifiable
outcomes
Useful to have a trade offs in the form oflighter touch regulation vs. regulatoryrequirements
Adds to the motivation to achieve the targetsin the negotiated agreement
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Relevant especially for new initiativesOr where direct regulation does not
apply
When the target audience are diffuseWhen there are sector specific issues
that are quite different to the generalsituation
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Public Disclosure / Ratings - MEPBenefits of Ratings.Citizens - improved information for
better negotiation
Stockmarkets - improved valuationRegulator - Boosts credibilityFirms - pro-active approach
(PROPER; GRP; Eco-watch)
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Gold World Class clean technology
Waste minimization & polln prevention
measuresGreen > legally required standards for env.
Protection
Good maintenance and environmental work
Blue At legally required standard
Red < legally required standards
Black Serious environmental damage no polln
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Change in firms ratings because of
PROPER
Rating June
1995
Dec.
1995
Dec.
1996
Change
(%)
Gold 0 0 0 0
Green 5 4 5 0Blue 61 72 94 54%
Red 115 108 87 - 24%
Black 6 3 1 - 83%Total 187 187 187
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Instruments used for industrial pollution
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Subsequent examples show the
relevance of pure transport
policies.
Examples of -SingaporeNorway and
California, US
Transport Management in
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Transport Management in
Singapore Land Zoning (Minimises the need for X-portation of
both people & goods.) Good Public X-portation Parking Fee actively differentiated Strict Fuel standards - Lead phase out & Sulphur Strict Vehicle Standard and Inspection &
Maintenance standards are enforced
Off-peak car scheme reduces fees somewhat forvehicle use only on weekends (and some other non-
peak days).
(Identification of off-peak vehicles by red licenseplates)
X-port Management in Singapore -
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X port Management in Singapore
Contd. Import duties for cars and Registration fees are
extremely high (This discourages the ownership of
personal vehicles). Fees are reduced when a newcar replaces an old one.
Under Vehicle Quota system - potential car ownersmust purchase a vehicle entitlement at a monthly
auction (86,831 COE for 2001-02).
Note: If de-registration then no. of COE Electronic Road pricing charges motorists for road
use according to vehicle, time of day and target levelof congestion. In 1998 - system was automated withintroduction of smart cards
(Allows electronic payment and avoid toll delays)
T ll F i Diff t
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Toll Fees in Different zones -Singapore (US $)
E id R d P i i i N
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Evidence: Road Pricing in Norway Norway has road pricing in three of its largest cities -
Oslo, Bergen and Trondheim
In 1991 - Trondheim (3rd largest city) with apopulation of 1,40,000 implemented a Toll Ringaround the city - used by entering motorist
Frequent drivers use electronic card and infrequentdrivers use coin machines.
High Rates during 6.00-10.00 a.m. Traffic by 10% during rush hours, while trips atother times
Revenues used for Road infrastructure, public X-port, and pedestrian & bicycle facilities.
Evidence: Congestion Pricing in
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Evidence: Congestion Pricing in
California To decrease congestion, a congestion toll is
established on two of the six lanes in each directionof State Route 91 in California.
The lanes were opened on December 27, 1995 Differential Tolls varying from 75 cents to 3 $. No toll on High Occupancy Vehicle (HOV) - vehicles
that carry 3 or more people (Similar to Micro-busesin Kathmandu).
Differential Toll Schedule in
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Differential Toll Schedule in
California
B fi f i i i i C lif i
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Benefits of congestion pricing in California
In 1997, Average daily weekday traffic (ADT)in toll lanes approached 30,000 vehicles (13%of total ADT).
In six months after opening the express lanes,the typically peak trip delay on the freeway from 30-40 minutes to 10 minutes.
Besides reducing congestion, it facilitated tomeet air quality and energy conservationgoals.
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Traffic Management in an intersection
Instruments to curb vehicular
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Instruments to curb vehicularPollutionMBI CAC Instruments
Type Direct Indirect Direct Indirect
Engine/Vehicle
E m i s s i o nFees (4)
Tradable Permits (4) Emission Standardse.g., EURO I, II (2)
Compulsory Inspection andMaintenance of emission
control system e.g., PUC (4)
Differential Vehicle
Taxation (1)
Technology
Standards, e.g.
Catalytic Converters
(3)
Mandatory Use of less
polluting vehicles / change in
engines e.g., gasoline to CNG
(2)Tax allowance for new
vehicles (1) Compulsory Scrappage (0)
Fuel Differential Fuel Taxation(1)
Fuel Composition e.g.
Pre-mixed 2T (1)
Fuel Economic Standards (1)
High Fuel Taxes (1) Phasing out of high
Polluting Fuels e.g.,
Unleaded petrol (1)
Speed Limits (4)
Traffic Auctioning
traffic routese.g. Chile (4)
Congestion Charges e.g.,
in Singapore (4)
Physical Restraint of
Traffic (4)
Restraint on Vehicle Use e.g.,
in Singapore, Mexico (0)
Parking Charges (4) Designated Routes
(4)
Lanes for buses, 2-wheelers
and cars etc. (4)
Subsidies for less
Polluting Modes (0)
Better Public Transport (0)
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Gap between Europe and India w.r.t. EURO
Norms
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Three Major Pollution Sources ingeneral -
Stationary or Point e.g., fromIndustriesNon-stationary or Mobile or non-point e.g., from vehicles, farms etc.
Indoor air pollution
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Emission Sources from Vehicles
Three Major Emission Sources ingeneral -
Emission from Gasoline Vehicles(2-stroke / 4-stroke)
Emission from Diesel VehiclesImpact of fuel quality on emissions
Emission from Gasoline Vehicles
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Emission from Gasoline Vehicles2-stroke engine requires 2% concentration of2T oil.
A modest 1% increase of oil may lead to 15% in SPM besides visible smoke (CPCB, 1999).
Controlling pollution from them cangenerate significant environmental benefits.
Mandating USE of 2T Oil (CAC) can be oneinstrument - e.g., in India
Emission from Diesel Vehicles
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Emission from Diesel Vehicles
Smoke from diesel vehicles:White smoke (due to cold start idling and at low loads)Blue smoke (burning of lubricating oil and additives)Black smoke (a result of incomplete combustion andconsists of fine soot/particulates)
Black smoke is problem with engines not well tuned
Proper and Regular maintenance of diesel
vehicle Black smoke
Mandating Regular maintenance (CAC) can be
another instrument.
Impact of fuel quality on emissions
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Impact of fuel quality on emissions
In diesel vehicles - a high density causes smoke, CO and NOx emissions. in Cetane number (i.e, measure of ignitionquality of diesel) smoke emissions.
Sulphur content of diesel SPM andSO2 emissions. Mandating low sulphur diesel or fuel
with high centane number (CAC) can be
other instruments.
There are three stages through
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There are three stages throughwhich vehicular emissions can be
controlledStage I - Pre-combustion stage - wherequality of fuel can be upgraded.
Stage II - Combustion stage - where enginemodifications are required.
Stage III - Post-combustion stage - whereexhaust treatment devices like catalytic
converters are required.
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As a consequence the policyinstruments can be oriented at
any of these stages and can bedirected towards
* Producers (vehicle or fuel)
or
* Dealers
(petrol pump /vehicle dealers)
Besides there are non technical
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Besides there are non-technical
instruments that can be aimed at
Consumers
They may require behaviouraladaptations in the mode of transport (fromcar to bus)
Stage 0or necessitate periodic maintenancecheck to minimize pollution levels
Stage IV
Instruments to curb vehicular
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PollutionMBI CAC InstrumentsType Direct Indirect Direct Indirect
Engine/VehicleE m i s s i o nFees (4) Tradable Permits (4) Emission Standardse.g., EURO I, II (2) Compulsory Inspection andMaintenance of emission
control system e.g., PUC (4)
Differential Vehicle
Taxation (1)
Technology
Standards, e.g.
Catalytic Converters
(3)
Mandatory Use of less
polluting vehicles / change in
engines e.g., gasoline to CNG
(2)Tax allowance for new
vehicles (1) Compulsory Scrappage (0)
Fuel Differential Fuel Taxation(1)
Fuel Composition e.g.
Pre-mixed 2T (1)
Fuel Economic Standards (1)
High Fuel Taxes (1) Phasing out of high
Polluting Fuels e.g.,
Unleaded petrol (1)
Speed Limits (4)
Traffic Auctioning
traffic routese.g. Chile (4)
Congestion Charges e.g.,
in Singapore (4)
Physical Restraint of
Traffic (4)
Restraint on Vehicle Use e.g.,
in Singapore, Mexico (0)
Parking Charges (4) Designated Routes
(4)
Lanes for buses, 2-wheelers
and cars etc. (4)
Subsidies for less
Polluting Modes (0)
Better Public Transport (0)
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Source: Dasgupta, 2001
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Traffic Volume
Ta
Demand
Marginal
Private Costs
Costs,Benefits
Pa
A person equates the marginal private costs of operatinga vehicle with the benefits (s)he derives.
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Traffic Volume
To Ta
Demand
Marginal
Private Costs
Marginal Social
CostsCosts,Benefits
Pa
Po
Traffic Volume with only private costs = Ta (Pa)
Traffic Volume with incl. of Social Costs = To (Po)
Ta>To (Pa< Po)
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