Negative Externalities in Cars

http://news.independent.co.uk/environment/article2334915.ece

According to this source, which was recently published, the high production and use of automobiles in England are actually producing more negative externalities than just pollution. The high demand by the population for cars is matched by a high supply of automobiles by numerous firms in the market. Cars are known for the amounts of pollution they produce, however, only recently was another negative externality discovered, that the cars increase chances of urban flooding. This urban flooding is caused by the high demand of land used for roads/parking lots and other car related structures due to the rising numbers of cars. This leads to the earth around these areas to be unable to soak up the majority of the rainfalls causing frequent flooding.

Negative externalities are defined as costs that result from an economic transaction that affect other groups or third parties negatively. This means that when producing certain goods, third parties could be negatively affected, in this case pollution and flooding. With negative externalities in society, the supply of the good is at equilibrium for the firms and the car industry, however, for society, the construction of the cars and roads exceeds the optimum amount wanted. This means that although the firms are producing at their own optimal level or efficiency, they are not producing at society's optimum level, making it a market failure and making it an inefficient system. A market failure occurs when resources are overallocated or underallocated, in this situation, cars and roads are being overallocated causing flooding, therefore resulting in market failure, as seen in the graph below.

As seen in the graph above the equilibrium point of the firms is not equal to the optimal equilibrium. The marginal private costs exceed the marginal social costs, showing that cars and roads are being overallocated, causing in the "external cost" to exist as seen by the arrow in between the two cost curves. Governments have several options to try and shift the marginal private closer closer to the optimal cost curve.

One of these options is to tax firms that are producing cars, or tax the construction of roads to prevent pollution and flooding from occuring. By taxing the firms that construct cars and roads, the production of these goods will be lowered, and the price of these good would increase. The amount of tax would depend on the good itself, and the amount of the tax would affect how far the marginal private cost curve shifts. The tax can be determined by matching the amount taxed to the external cost to equal the two curves. By taxing the car industry, less cars would be produced, reducing the amount of pollution in the air, and get all the car buyers/sellers to bear full costs of cars(which is more now since they cause urban floods as well). Also by building less roads, or making the road production more expensive, flooding can be prevented, because less natural land would be covered by roads.

As seen here in the second graph, when taxes are implemented for the production of cars or roads, the supply of the goods shifts down/towards the left. When compared to the first graph, it can be seen that the marginal private cost is closer to the optimal cost, decreasing the overall amount of external costs.

Another option the government has is to subsidize land owners, who may sell their lands to firms who want to place roads there. If the government subsidizes the land owners, the supply of land would shift closer to an optimal level for society and may get quite close to the optimal level. This would also reduce the amounts of roads built, thus decreasing the amount of cars since they are complementary goods. This would allow for less amounts of flooding, since the natural land is able to soak up the water created from rainfall instead of flooding if there were roads.

A final method could be to make the construction of roads in certain areas of England completely illegal, to prevent the entire flooding situation from further escalating. By making it illegal, and implementing fines to those firms who continue mass production, supply of the cars and roads will be reduced. However, depending on the amount fined, firms may decide to continue to supply the cars and roads, if profit is still available. So these are three methods the government in England can use, however, thus far, the government has not done anything to prevent the pollution and urban floods.