(2024) A Level H2 Econs Paper 2 Essay Q2b

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Introduction

The environmental damage caused by car use represents a significant negative externality. Vehicle emissions, particularly from petrol and diesel-powered cars, contribute to air pollution, smog, and climate change. These effects impose external costs on society, such as higher healthcare expenses due to respiratory issues and the long-term costs of mitigating climate-related disasters like flooding caused by rising global temperatures.

Consideration of whether road pricing is the most appropriate policy choice to reduce the environmental damage caused by car use

Road pricing functions as a form of tax on road use, directly increasing the private cost of driving. By raising the marginal private cost (MPC) of car use, road pricing aligns the MPC with the marginal social cost (MSC), ideally achieving an output level Qs where MSC equals the marginal social benefit (MSB). This internalisation of external costs can reduce car use and, consequently, the emissions that cause environmental damage.

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However, the effectiveness of road pricing as a policy to reduce environmental damage may be limited by the type of vehicles on the road. Electric cars (EVs), for instance, produce fewer or no tailpipe emissions, meaning they contribute less (or none) to air pollution compared to petrol or diesel cars. If road pricing is uniformly applied to all vehicles, it could discourage EV adoption, undermining its environmental benefits. A more nuanced approach, such as taxing electricity generated from pollutive sources like coal, would be more appropriate for EVs, as their environmental impact depends on the source of electricity.

Additionally, road pricing is often more effective in addressing the negative externalities of congestion rather than environmental damage. Singapore’s ERP 2.0 system, which uses GPS-based technology to charge for road use dynamically, could resolve some practical limitations, such as the inability to charge for every road. Nevertheless, road pricing alone may not sufficiently address the environmental externalities associated with car use, particularly emissions.

Alternative policy: Subsidise electric cars
An alternative policy to reduce environmental damage is the subsidisation of electric cars. EVs have no tailpipe emissions and, if powered by clean energy sources such as solar or wind, contribute minimally to environmental damage. Subsidising EVs can encourage consumers to switch from petrol or diesel-powered vehicles to cleaner alternatives, directly reducing emissions and mitigating climate change.

Subsidising electric cars also aligns with long-term environmental goals, promoting the transition to a sustainable transport system. For example, governments could offer tax rebates or grants for EV purchases, making them more affordable and accelerating their adoption. Such measures have been successfully implemented in countries like Norway, where EVs now make up the majority of new car sales due to substantial subsidies and incentives.

However, subsidising EVs has drawbacks. It may impose a significant fiscal burden on the government, diverting funds from other priorities. To address this, governments could simultaneously tax the sale of petrol and diesel cars, creating a revenue-neutral framework. Moreover, subsidies for EVs might inadvertently encourage more driving, increasing road congestion, which is another form of negative externality. Policymakers must balance the benefits of reduced emissions against the potential rise in congestion.

Evaluative conclusion

While road pricing is an effective tool for addressing congestion and reducing overall car use, it is not the most appropriate standalone policy for mitigating the environmental damage caused by car use. The variability in environmental impact between petrol/diesel cars and EVs makes a blanket application of road pricing inefficient.

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