Policy Instruments Lecture

7/28/2019 Policy Instruments Lecture

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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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