South-Western College Publishing - Economics  
Dying For Fresh Air
Subject Market failure
Topic Economics and the Environment
Key Words Pollution, health standards, congestion charges, tolls, surcharges, costs, benefits
News Story

There is a controversy over whether London has a pollution problem or not. According to UK government data and the Friends of the Earth (FoE), air quality deteriorated more in 1999 than in any year since 1993 when records began. The number of days on which air pollution exceeded health standards rose by 20 percent in cities and 53 percent in rural areas. The Department of Health has estimated that 24,000 people may die prematurely each year due to air pollution.

However, according to a study commissioned by the National Health Service (NHS) Executive, the level of toxic emissions is falling, especially rapidly in London, due to catalytic converters on cars, better vehicle technology, and the use of cleaner fuels. As a result, London's air is more breathable than in New York, Tokyo, and Los Angeles. The air in Cairo is three times worse. The problem that remains is argued to be due to a small number of old or badly maintained cars. Healthy people should not be at risk. The study's author believes that congestion charges, such as road tolls and workplace parking surcharges, might help reduce congestion, but that air pollution would not be significantly reduced; in general, he cautions that air pollution standards may increase economic costs more than they provide benefits.


(Updated April 1, 2000)

1. Draw a supply and demand diagram of the market for automobiles in the UK. Mark the equilibrium price and quantity.
  a) Which curve represents marginal private benefits?
  b) Which curve represents marginal private costs?
  c) What is the difference between private and social costs? Give some examples from the news story.
  d) Draw the marginal social cost curve on your diagram. What is the socially optimal point of production and the corresponding price?
  e) The UK government has reduced the difference between the two curves. How did it shift the marginal private cost curve?
2. The author of the NHS Executive study states that levying tolls and charging more for parking might cost more than is gained.
  a) On your diagram, reflect an excessive increase in tolls and parking fees in a new marginal private cost curve and a new equilibrium price and quantity.
  b) Why is the increase in congestion charges excessive? What economic problems result?
Source Barrie Clement, "Londoners breathe 'cleanest city air in world'," The Independent, January 17, 2000.

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