Discuss about the Concept of Substitute and Complementary.
In today’s world, there is increasing concern for mitigating air pollution. One major factor contributing to the growing air pollution is the smoke emitted from burning of petrol and diesel in vehicles. To counter air pollution, countries around the world are taking steps to reduce carbon emission. France has announced to ban use of diesel and petrol vehicle by 2040. The Policy is initiated to address public health concern. Pollution entails negative externality and thus leads market failure. The concept of market failure is analyzed using microeconomic framework and concept of efficiency. To fulfill the objective of banning petrol and diesel vehicles government of France incentivizes household for using alternative theses vehicles such as electric car or plug in hybrid vehicles. Apart from its direct impact on petrol and diesel car, market the policy likely to affect non-petrol and diesel car market as well. This is evaluated using the concept substitute and complementary good.
Market failure signifies a situation where market alone cannot ensure efficient outcome. This is likely to be happened in the presence of any external factor that leads to a discrepancy between social and private benefits and costs. Externality is the event when agents not directly or indirectly included in any activity but still affected from that activity and this is not included in evaluation of the activity (Nicholson and Snyder 2014). There are two types of externalities that are found to be present. One is positive externality and another is negative externality. In times of positive externality, social benefit exceeds that of private benefits. In the presence of negative externality, social cost exceeds private cost. Both leads to an inefficient market outcome and government policy intervention are needed to correct the inefficiency.
The essay points to the ban of petrol and diesel vehicle by 2040. The smoke emitted from burning of fossils fuels in petrol and diesel run vehicles comprises harmful gases. This smokes when mixes with atmosphere then pollute the air. People who breathe the air fell ill. This imposes a social cost that its users or producers do not account. Here social cost is greater than private marginal cost. This situation is described in the following figure.
The figure above describes the how the presence of a negative externality leads to an inefficient market outcome. Demand curve represents marginal social benefit while the supply curve represents marginal private cost. In presence of pollution, marginal social cost lies above the marginal private cost curve (Baumol and Blinder 2015). Market outcome is obtained at the intersection of marginal social benefit curve and private marginal cost curve. Corresponding market price and quantity are P* and Q* respectively. However, efficient outcome is that which is obtained from intersection of marginal social cost and marginal social benefit. Efficient quantity is Qe and efficient price is Pe. With negative externality and market failure, the market produces more than the optimum quantity.
To address the issue of market failure and to correct the negative externality government intervention is required. The environment ministry in France has taken an extreme step and announces for a ban in the use of petrol and diesel by 2040. Obvious impact of this policy is on the car manufacturer and put pressure on them by banning the use of diesel and petrol vehicles. However, current market research points that they the current projects of these manufacturers will help to stand on this promise (Klier and Linn 2015). In order to make the banning project successful, the plan incorporates of providing subsidy premium to poor household so that they can easily replace their pollutant vehicles with clean alternatives. As a part of this plan, France has also decided to restrict the use of coals for producing electricity. This further includes an investment of €4bn to increase energy efficiency. All these are undertaken to maintain leadership of France in the changing climate policy. The policy will affect daily lives of people in France. Prior to France, Norway and Netherland was announced for banning use of Petrol and diesel run vehicles by 2025. Indian and Germany have announced to go for a similar policy by 2030 onwards (theguardian.com 2017).
The policy of banning petrol and diesel vehicles followed immediately with the announcement of Volvo to manufacture only electric cars. Banning of these vehicles is likely to have a severe impact on the sales of current car manufacturer in France. Though it would create a tough condition for car manufacturer but the ministry has belief that the industry is well equipped to stand this challenge and can make successful transition. The manufacturers have well designed strategies to survive their business. The main objective of this policy is to address the public health issue arising from public health. Successful implementation of this policy gives France an important place among the world’s leader of climate action (independent.co.uk 2017). Norway that is considered as comprising highest electric cars penetration has announced a target of 100% sales or plug in hybrid cars and electric cars. Some other countries though initiated similar ban strategy but they have not taken any concrete steps yet.
The immediate effect on ban on diesel and petrol vehicle is on the market of electronic vehicle. As a substitute of petrol and diesel market France is giving attention on developing Electronic car market. As an alternative to petrol and diesel car people will demand electronic cars. This raises the demand for electronic car and helps the market to explore more.
With banning of petrol and diesel car, the demand for electronic car will increase (Bernanke, Antonovics, and Frank 2015). As a result the demand curve for electric car shifts rightward from DD to D1D1. This result in an increase in both the price and quantity produced in the electronic car market. This is supported from the evidences found in the automobile industry of France. Over the last few years a significant progress is found to be made in Electric car markets. Number of electric car users has rapidly increased from 10,000 in 2012 to nearly 100,000 in 2016 (cleantechnica.com 2017). Government of France has provided several incentives in the form of environment bonus or tax exemption followed by an ownership of electronic cars. All these increase the demand for registering under electronic or hybrid car models.
When market for electronic car expanded then demand for inputs or its complementary goods increases. Related markets of electronic car are research activities in the area of energy use, battery production, charging point, investment of local government, design of different EV models and grid and road infrastructure (ieahev.org 2017). This market is expanding with expansion of electronic vehicle market. Different automotive manufacturers such as Renault, Bollore, PSA are encouraged to launch their electronic car model.
The rise in demand and sales of electronic cars expands the demand for battery, charging points and other related components this car market. The demand curve for these goods will shift rightward as in the previous. The effect is same as explained above.
Use of electronic cars as an alternative to petrol and diesel cars raise the question that whether the nation can provide sufficient charging points for newly generated and growing number of electronic cars. In order to meet the aim of government to mitigate carbon emission, more wind farms can be needed. Wind is renewable source of energy and no harmful substances are emitted when power generated from the Wind mill. Another alternative source of power generation is the nuclear energy station.
Conclusion
The paper has evaluated policy of petrol and diesel vehicles ban as announced by environment ministry in France. The policy aims at addressing negative externality generated from the smoke emitted from petrol and diesel vehicles. With negative externality, market output is greater than efficient output. Hence, government intervention is needed to ensure efficient outcome. Polluted air is causing serious health problem. Government gives priority to public health and aims at banning petrol and diesel vehicles. Petrol and diesel carmakers are likely to suffer from this ban. However, given their status France is confident that they can face this challenge. Many car manufacturers are now increasing electric car manufacturing. Volvo has already committed to manufacture only electric and hybrid cars. Renault, Nissan, PSA are some famous manufacturer who now focusing on launching models of electronic vehicles. Numbers of registered users of electric cars have increased ten times in between 2012 and 2016. Government is providing incentives to household to help them switching from the old vehicles to a newer one. With rising demand and availability of electric cars, demand for components like battery production, charging point and others have also increased. Concern remains whether there are enough charging points for newly available electric cars. Attention should also be given on establishment of more wind farms and nuclear power plants.
References
Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Cengage Learning, 2015.
Bernanke, Ben, Kate Antonovics, and Robert Frank. Principles of macroeconomics. McGraw-Hill Higher Education, 2015.
Chrisafis, Angelique, and Adam Vaughan. 2017. “France To Ban Sales Of Petrol And Diesel Cars By 2040”. The Guardian. https://www.theguardian.com/business/2017/jul/06/france-ban-petrol-diesel-cars-2040-emmanuel-macron-volvo.
Farand, Chloe. 2017. “France Is Banning All Petrol And Diesel Vehicles”. The Independent. https://www.independent.co.uk/environment/france-petrol-diesel-ban-vehicles-cars-2040-a7826831.html.
“France – Industry – France | IA-HEV”. 2017. Ieahev.Org. https://www.ieahev.org/by-country/france-industry/.
Klier, Thomas, and Joshua Linn. “Using taxes to reduce carbon dioxide emissions rates of new passenger vehicles: evidence from France, Germany, and Sweden.” American Economic Journal: Economic Policy 7, no. 1 (2015): 212-242.
Nicholson, Walter, and Christopher M. Snyder. Intermediate microeconomics and its application. Cengage Learning, 2014.
Pressman, Matt, and Matt Pressman. 2017. “Electric Car Incentives In Norway, UK, France, Germany, Netherlands, & Belgium”. Cleantechnica. https://cleantechnica.com/2017/09/02/electric-car-incentives-norway-uk-france-germany-netherlands-belgium/.
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