Externalities in Transportation System

Course Title: Government Finance

Course Code: F-310
Department Of Finance
Faculty of Business Studies
University of Dhaka
 Submitted to

Md. Mukhlesur Rahman

Lecturer

Course No: F-310

Department of Finance

University of Dhaka

Submitted by

Group-07

BBA 14th Batch

Section: A

Department of Finance

University of Dhaka

DATE OF SUBMISSION

January13, 2011

2
 GROUP PROFILE

NAME ROLL NO

Liza Nabi 14-051

Faruque Ahamed 14-059
Nausheen Ahmed 14-065
Marjia Sultana 14-075
Tauhida Umme Hafiza 14-079
Mahafuza Sultana 14-085
Shubhashis Kundu 14-105
Fariha Alam 14-115
MD. Nahim Uddin 14-125
S. M. Rajoan 14-159

3
 Letter of Transmittal

January 13, 2011

Md. Mukhlesur Rahman

Lecturer

Department of Finance

University of Dhaka.

Subject: A Report on Externalities in Transportation System.

Honorable Sir,

We are being advised to prepare a report on Externalities in Transportation System. As was

advised, we have successfully completed our report .It gives us immense pleasure to tell you that
working on this report has given us a wide range of exposure. It enabled us to know about, how
government can take the best decision for the public. This project helped us tremendously to
understand the implication of theoretical knowledge in the practical field.

We have undertaken our sincere effort for successful completion of the term paper. If we have
any unintentional error and omission that may have entered into this term paper will be
considered with sympathy.

Therefore, we beg your kind consideration in this regard, we will be very grateful if you accept
our report and oblige there by.

Sincerely,

Group-07

B.B.A. 14th Batch

Department of Finance

University of Dhaka.

4
 Acknowledgement

Preparing this report was both exciting and hard work at the same time and we had a real life
experience on externalities & its effects. The varied nature of the matters dealt with has entitled
references too many sources and to all of these sources we gladly acknowledge our indebtness
for the ideas and information they have provided.

First of all we want to give thanks to the Almighty. Then we would like to give our hearty thanks
to our course teacher Md. Mukhlesur Rahman for his all around supervision. On top of that we
are greatly thankful to our honorable teacher professor M. Masud Rahman, who taught us the
topic “externalities” with utmost care & convenience.

We would also like to express our gratitude the other concern people who ease our task by
providing information. First of them is the honorable teacher ,Sumon Kumar Mitra of Urban
&Regional Planning department of Bangladesh University of Engineering & Technology
(BUET). We are grateful to all concern people in Bangladesh Road Transport Authority
(BRTA), National Broad of Revenue (NBR), Bangladesh Poribesh Andolon (BAPA) for
their generous help.

5
 Executive Summery

The issue of transportation and the environment is paradoxical in nature. From one side,
transportation activities support increasing mobility demands for passengers and freight, and this
ranging from urban areas to international trade. On the other side, transport activities have
resulted in growing levels of motorization and congestion. As a result, the transportation sector is
becoming increasingly linked to environmental problems. With a technology relying heavily on
the combustion of hydrocarbons, notably with the internal combustion engine, the impacts of
transportation over environmental systems has increased with motorization.

Air pollution is a serious problem in many developing country cities which is occurred for
transportation system. Ambient concentrations of fine particulate matter, which is one of the
most damaging air pollutants, are often several times higher in developing country cities like
Dhaka in Bangladesh compared to those in industrial countries. The largest human and economic
impacts of air pollution are the increased incidence of illness and premature death that result
from human exposure to elevated levels of harmful pollutants. Using damage to human health as
the primary indicator of the seriousness of air pollution, the most important urban air pollutants
to control in developing countries are lead, fine particulate matter, and, in some cities, ozone. Air
pollution impacts in developing countries often fall disproportionately on the poor, compounding
the effects of other environmental problems such as the lack of clean water and sanitation. While
the impacts of urban air pollution have been documented in both industrial and developing
countries, for policymaking purposes it is important to know the relative contribution of mobile
sources (cars, trucks, buses, motorcycles). In the transport and transport fuel-supply sectors,
many actors must be part of an effective strategy for reducing mobile-source emissions. To be
effective and sustainable over the long term, regulatory and policy instruments for reducing
transport emissions must provide incentives for individuals and firms to limit the pollution from
existing vehicles and to avoid delay in adopting new and cleaner technologies and fuels. Public
and private institutions must be equipped with the resources and the skills necessary to support
measures to control transport emissions and to evaluate the effectiveness of such measures.
Above all, interventions must be cost-effective and affordable in light of the myriad of other
pressing needs in developing country cities.

6
 Introduction & Methodology

Purpose of the Study:

This report is core subjective area of “Public Finance". Here we have conducted both qualitative and
quantitative analysis to make externalities analysis in Transportation System in Bangladesh. The purpose
of the study is to understand how measuring the full social costs of transport are to identify what policy
actions would bring about a more efficient use of transportation and mix of transport modes. To take the
decisions we do cost-benefit analysis, main purpose of this study is to make ourselves familiar with the
real life externalities problems and to find out their possible solutions, which will make us more
competent to solve practical problems in our working life.

This report (externalities in transportation system) also includes various types of graphical
design, which help to depict the externalities structure as well as the public finance decision‟s
features.

Origin of the report:

This report (externalities in transportation system) is assigned by our honorable course teacher
Md. Mukhlesur Rahman as a partial fulfillment of the course F-310 “Public Finance". The report
is the elaboration of external and internal public Finance decision making among our group
members. It was a mater of group discussion and understanding. Report submission and
presentation is the requirement for Bachelor of Business Administration (BBA) degree. We think
that this case analysis will enhance our conceptual knowledge about government financing and
now we are confident enough to solve any government base problem relating to externalities.

Scope of the Study:

The scope of this report is limited within the negative externalities of transportation system in
Bangladesh.

7
Objectives:

To fulfill the partial requirement of BBA degree.

To be able to use theoretical knowledge whenever any practical public finance problem arises.

To develop our skill in using analytical tools and techniques for analyzing public financing
problem.

To develop our interpersonal views and concept through sharing among every member of the
group that is reflected in this report.

Methodology and Sources of Information:

Correct and smooth completion of a report requires adherence to some rules and Methodologies.
Rules were followed to ease the date collection procedure. Accuracy of study depends on the
information and data analysis.

Various reports collected from Bangladesh University of Engineering & Technology (BUET).

By applying subjective judgment some data are assumed that are not given in the case.

Both Qualitative and Quantitative analysis are made.

The theoretical part of this report has been collected from text that we have studied in our
B.B.A. courses.

This statement also entitle that this report is totally based on our group discussion and
understanding. During the report preparation all the members have spontaneously performed
their own duties to come to a solution of the case. In preparing the report, we have neither taken
any undue help from others nor make up any freak data.

8
Limitation:

Although efforts made to make the report was as comprehensive as possible, nevertheless, the
following limitations are identified at the time of preparing the report:

We worked under a limited time passage.

A lot of information regarding externalities is required.

We have put our optimum effort to formulize the available information

Many analytical techniques and tools are needed to apply to get appropriate result but due to
our lack of practical knowledge our analysis may not be a highly efficient one.

Lack of experience also acted as constraints in the way of exploration on the topic.
Perhaps a small budget prevented us from doing everything that should have been done.

9
 Table of Contents
Letter of Transmittal 04

Acknowledgment 05

Executive Summery 06

Introduction & Methodology 07

Chapter-1

Transportation & Communication in Bangladesh 13

General Overview 13
Growth of Different Modes of Transportation 14

Major Constraints 15

Transport Sector Allocation in Past Plans 15

Financial Performance of Transport Sector Parastatals 15

Fifth Five Year Plan 16

Priority investment programmers/projects 18

Chapter-2

An Overview of externalities 20

Externalities 20

How externalities arise 20

Effect of Externalities 21

The importance of measuring externalities for actual resource allocation21

10
 Chapter-3

Externalities in Transportation System 22

Goods and Bads in Transportation 22

External costs of transport 23

Dealing with the Externalities 24

Chapter-4

Imposition of Pigouvian Tax for Removing Externalities: Better Approach

or Not 26

Benefits Derived 28

Decision Criteria : Better Approach or Not 28

Chapter-5

Regulatory Instruments to Control Externalities from the

Transport Sector 30

General Overview 30

Types of Regulatory Instruments: 1.Fuel economy standards 30

2.Emission standards

3.Fuel quality standards

4.Other regulatory measures

Government Preference of Regulatory Instruments over Taxation 32

11
 Chapter-6

Regulatory Instruments in Bangladesh 33

Emission Standards in Bangladesh 33

Other regulatory measures Taken by Bangladesh Government 35

Chapter-7

Recommendation & Conclusion 36

Tables
Table 1 : Modal Share of Passenger and Freight Traffic 13

Table 2: Annual Sectoral Shares (%) of GDP at current price 14

Figures

Figure1: Transportation Externalities 23

Figure2: Congestion Charges 26

Figure3: CNG vs. Non-CNG vehicles and their emissions 34

12
 Chapter-1

Transportation and Communication in Bangladesh

General Overview

Bangladesh, a densely populated country with an estimated population of 978 persons/sq km,
has an extensive and diversified transport system comprising 1,03,536 km roads (20,948 km
highways and 82,588 km rural roads), 2834 route km railways, 24,000 km inland waterways,
2 seaports, maritime shipping, and civil aviation 3 international (Dhaka ,Sylhet and
Chittagong) and 8 domestic airports etc.. Of multiple modes of transportation the road
transport by an order of magnitude in carriage of goods and passengers has apparently been
playing the most dominant role. Passenger-km and freight ton-km performed by different
surface modes of transport are given in the table below:

Table 1: Modal Share of Passenger and Freight Traffic

Modes of Passenger-km Passenger Ton-km Freight Modal

Transport (billion) Modal Share (billion) Share
Road 98.4 88% 15.7 80%
Rail 4.2 4% 0.8 4%
IWT 8.9 8% 3.0 16%
Total 111.5 100 19.6 100

An adequate and efficient transport system is a pre-requisite for both initiating and sustaining
economic development. Investment in improving transport efficiency is the key to expansion
and integration of markets - sub-national, national and international. It also helps the generation
of economies of scale, increased competition, reduced cost, systematic urbanization, export-led
faster growth and a larger share of international trade.

13
 Table 2: Annual Sectoral Shares (%) of GDP at current price

Sectors Name Sub- sector % of GDP

Land Transport 7.53
Bangladesh Railway 0.08
Road Transport (mechanized) 5.28
Road Transport ( non-mechanized) 2.17
Water 0.64
Air 0.10
Total 8.27

Growth of Different Modes of Transportation

1. Bangladesh witnessed rapid growth of transport since Independence. The overall annual
growth rate was nearly 8.2 per cent for freight transport and 8.4 per cent for passenger
transport. Even then the transport intensity of the Bangladesh economy is considerably lower
than that of many developing countries.

2. The relative roles of transport modes are evolving with road transport expanding at the
expense of railways and inland water transport because of its inherent technical and cost
advantages. According to Bangladesh Transport Sector Study (1994), the volume of road
transport increased by 88 per cent from 1985 through 1993, whereas the volume of transport
by water as well as rail declined in almost equal proportion.

3. With the commissioning of the Bangabandhu Bridge, the volume of road transport for both
passenger and freight is expected to increase quite substantially. In order to enable the
beneficiaries to avail of its full potentials, the bridge will generate demand for construction of
by-passes and roads and bridges in different strategic parts of the country. Thus, the future
expansion programme of each of the surface transport modes in providing transport services
depends crucially on government policy and investment decisions keeping in view the past
transport development trend and the recently changed scenario in the transport sector. Modal
shares of three surface transports- road, inland water way and railway in 1997 (estimated on the

14
 basis of 1993 and 1996 data) are 72 per cent, 17 per cent and 11 per cent respectively for
passengers and 65 per cent, 28 per cent and 7 per cent respectively for freight.

Major Constraints

The development of surface transport system in Bangladesh is constrained by three distinct sets
of factors. These are physical (e.g., difficult terrain, periodic flooding, poor soil condition,
siltation and erosion of rivers, inherited management weaknesses of BR etc.), low investments
and maintenance and inadequate institutional framework (four ministries, nine transport sector
parastatals and lack of co-ordination and autonomy of transport parastatals).

Transport Sector Allocation in Past Plans

The public sector allocation for the transport sector during the past Plans in base-year prices
of each plan period are shown in Table .

* This amount includes Tk. 2,620 million allocated by NICAR for thana connecting roads and
Tk. 1,033 million allocated for the roads of Chittagong Hill Tracts from special fund.

Financial Performance of Transport Sector Parastatals

Public sector involvement in the transport system of Bangladesh consists of ownership and
operation of nine parastatals. The parastatals have poor financial performance except the two
seaports. The poor financial performance of the parastatals and their weak capital structure
created a financial liability on the government of around Tk. 2,000 million annually till 1995.
However, the situation has been improving in recent years. To address the problem, the
government has been pursuing the two-pronged policy of privatisation and restructuring of
public sector transport parastatals for achieving improved administrative & management.

15
Fifth Five Year Plan

Objectives:

To achieve an average GDP growth rate of 7 per cent per annum the transport sector growth
rate is projected to increase by 7.51 per cent per annum. Keeping in view the increased
volume of domestic traffic as well as the accommodation of future traffic from the Asian
Highway and Trans-Asian Railway, the main objective of the Fifth Plan will be to develop a
balanced and integrated transport network through adoption of strategies/programmes as
described below.

Strategy :

For transport network development strategy, an optimal mix of "market integration approach"
and "poles of development approach" will be adopted. Operational significance of this mixed
strategy is that development efforts will be concentrated on five main corridors: Dhaka-
Chittagong, Dhaka-Northwest, Dhaka-Khulna, Dhaka-Sylhet and Khulna-Northwest with
special emphasis on Dhaka-Chittagong, Dhaka-Northwest and Khulna-Northwest arterial
corridors. Besides these, the road linkages passing through Khulna, Barisal, Bhola,
Lakshmipur and Chittagong will be improved. This development strategy is to be reinforced
by the rural transport development strategy. Rural transport system will be developed by
integrating inland water transport sub-sector with the existing road transport system and
within the road transport sub-sector by adding off-road internal access dimension. To this
network development strategy, urban transport sector dimension will be added. The elements
of this strategy to be pursued during the Fifth Five Year Plan will be as follows:

a. The `Arterial Corridors' will be designated as 'Strategic Corridors' and required investment
will be made for the development of bridges, ferries and road upgrading works on these
corridors to raise them to international standards so that these can carry the regional and inter-
regional traffic;

b. The two sea ports will be further developed and linked to Dhaka, which connects all the
four major regions of the country;

c. Railway linkages will be established between the east and west zones of the country;

16
d. The development strategy for the rural transport will be reoriented for efficient external
access through optimal integration of road and inland water transport and off-road internal
accesses;

e. Improvement in resource mobilization will be made through introduction of user charges

and fees by the agencies;

f. Improvement of the management and operation of transport parastatals, including eventual

privatization of all or parts of specific transport parastatals will be aimed at;

g. Provision of required incentive packages for the private sector for greater participation, not
only in transport services, but also for infrastructure building will be made;

h. Identification and implementation of preventive, emergency and post-disaster mitigation

measures will be made. To minimize road accident, road safety administration will be
adequately strengthened;

i. Broadening the framework of transport development strategy by incorporating the vital

urban transport dimension starting with improvement in transport services of greater Dhaka
city will be undertaken;

j. Assurance of deficit-free operation of Bangladesh Railway as envisaged in Railway

Recovery Programme will be fulfilled;

k. Improvement of sub-standard ferry operation on major road networks will be made;

l. Introduction of necessary institutional reforms to address the operational constraints of the

port transit system with special reference to containers and privatization measures for port
transit system will be made;

m. Adequate care will be taken while developing transport network and service so that these
do not cause environmental pollution and affect ecological balance; and

n. Provision of duty-free or low duty import of engines and spares for mechanization of
country boat will be made.

17
Priority investment programmes/projects:

In conformity with this strategy the following programmes will be undertaken and completed
a. Completion of the Bangabandhu Multipurpose Bridge project along with the access roads;

b. Completion of Dhaka Eastern By-pass;

c. Construction of five major road bridges, two in the Mongla/Khulna - Northwest corridor
and one in Dhaka - Sylhet corridor and one over the Dakatia at Chandpur and another over the
Laokhali at Patuakhali ;

d. Completion of Jamuna Railway Link Project. ;

e. Completion of the construction of ongoing arterial roads projects including their

rehabilitation and maintenance;

f. Undertaking the rehabilitation and maintenance of core network of Railway, including

signaling and telecommunication systems;

g. Construction of container terminals at Chittagong sea-port and expansion and

modernization of container handling facilities at sea-ports;

h. Development of a new cargo-cum-general container composite port at Dhaka, and inland

Railway container depots at Dhaka, Tongi and Joydevpur;

i. Maintenance of appropriate draft of sea-ports as well as inland navigational channels

through appropriate dredging;

j. Development of a deep water sea-port at Chittagong to cater to domestic as well as regional

needs;

k. Undertaking programmes for the development of ferry links to off-shore islands between
Shariatpur and Chandpur and mechanisation of country boats;

l. Development of M.A. Hannan Airport at Chittagong and Osmani Airport at Sylhet up to the
standards of international airport; encouraging private sector participation in air transport;

m. Initiation of programmes for the addition of a second runway at the international airport at
Dhaka and building another airport at Trishal;

18
n. Development of the airports of Barisal, Khulna, Bogra, Rajshahi, Saidpur and Patuakhali;

o. Improvement of the urban transport system starting with Dhaka city through construction
of new infrastructure and development of mass transit system;

p. Extension of road network in Chittagong Hill Tracts; and

q. Planning road and railway links and ports to the end of regional and sub-regional co-
operation.

19
 Chapter-2

An Overview of Externalities

Externalities

An externality is that situation in which the actions of one agent impose a benefit or cost on
another economic agent who is not party to a transaction.

Externalities are the difference between what parties to a transaction pay and what society pays

A pecuniary externality, increases the price of a resource and therefore involves only transfers,
A technical externality exhibits a real resource effect. A technical externality can be an external
benefit (positive) or an external disbenefit (negative).

Examples of externalities:

A smoker annoys others with second hand smoke.

A gardener delights a neighbor with his beautiful garden.
A pulp mill pollutes the air and water in town.
A perfume wearer gives a friend an allergic reaction.

How externalities arise

Externalities arise when the consumption and/or the production of one or more individuals
unintentionally alters the utility and/or the production functions of one or more individuals
without those persons being compensated or forced to compensate others for that economic
activity. Externalities can either be positive or negative.

20
Effect of Externalities

1. Fixing externalities
Finding a solution to the externality problem requires that the parties take into account the effects
of what they're doing. For example, there have been a number of legal cases suggesting that you
don't have any property rights to the view from your home. However, if you don't want your
neighbors to build a house that will obstruct your view of the surrounding area, you can offer
them money to build in another way, or you can buy the entire property from them.

2. Companies are vulnerable

When there is no measurement of negative externalities companies become vulnerable. They will
produce as their needs which make them more profitable. But because of this excessive
production surrounding people will be effected highly.

3. Externalities and profits

The degree of importance of particular externalities varies greatly & many externalities are of
much greater magnitude. A large company's decision about where to put its corporate
headquarters can have a significant impact not just on the people who provide the company with
land and construction work but also on the entire community.

The importance of measuring externalities for actual resource allocation

By ignoring to price externalities resource allocation will suffer as projects which would be
socially profitable when including all externalities may not be so if only private costs are
calculated.

21
 Chapter-3

Externalities in Transportation System

Goods and Bads in Transportation

Transport services themselves are a good. They are an essential input into the production process
and personal consumption. By convention, however, national-income accounts do not include
non-traded items. The cost to the community of externalities associated with productive activities
such as transport is therefore not deducted from GDP figures
Exhaust emissions, the additional delay imposed on other road users by an extra vehicle entering
a busy street, noise, and accidents are commonly cited examples of „bads‟ generated by the
transport sector. But traffic congestion or noise can also occur on railway lines, on cycle paths,
or at airports. And roads and railway lines may create negative externalities if they cut through a
town and restrict movement within the community. A positive externalities can be created by
transportation sector but as they are very limited in numbers so only negative externalities are
discussed below.

22
 Figure1: Transportation Externalities

External costs of transport

The marginal external costs of transport use correspond to the costs caused by an additional
transport user that are not borne by the user himself but by others.

The marginal external congestion costs are present whenever an additional vehicle in the
transport network reduces the speed of the other transport users. A lower speed has several
effects. It affects the operating costs of the other transport users, and their time costs. Their time
costs increase not only directly because of lower speed, but also indirectly due to schedule
adjustment.

The marginal environmental costs include the costs imposed by the emission of air pollutants and
noise on society in general and on future generations (in the case of air pollution and global
warming).

23
The marginal external accident costs are not straightforward to define. When an additional
vehicle joins the traffic flow, it causes three types of costs to society.

First, the transport user himself is exposed to an accident risk. The social costs of this
consist of his own utility loss due to the accident risk (which is internal), the so-called
pure economic costs associated with the accident risk (net output loss, medical costs,
police costs etc.), and possibly also the utility loss of relatives and friends
Secondly, the additional transport user may have an impact on the accident risk of the
other infrastructure users and therefore on the associated costs for society and these other
users.
Thirdly, other transport users will adapt their behavior when confronted with a changed
traffic situation. These avoidance costs should also be taken into account.

How much of these three types of costs is external depends on the liability and compensation
rules that are in vigor, on the type of insurance pricing, etc.

Dealing with the Externalities

Negative externalities impose costs on the community. But eliminating them altogether would
also impose significant costs. A socially optimal level lies somewhere in between, with some
amount of “bad” tolerated in exchange for the benefits of economic activity. However, the social
benefits of reducing an externality must outweigh the social costs of doing so, if the community
is to benefit overall.

Regulatory
Instruments
Means of reducing
Externalities
Imposition of
Tax ( Pigovian
Tax)

24
Regulatory Command and Control

Regulatory command and control approach is one means of reducing externalities. Regulation
may be justified when “economic instruments” are not feasible. However, regulations can be
highly arbitrary, may involve significant costs of administration or enforcement, do not
encourage reductions below official limits, and fall with equal force on all.

Imposition of Tax ( Pigovian Tax)

A polluter can be required to internalize transportation externality by paying a tax or charge to

reflect the additional costs to society from the externality. Imposition of such “pigovian tax”
named in recognition of their first proponent, A.C. Pigou, results in a socially optimal level of
pollution.

25
 Chapter-4

Imposition of Pigovian Tax for Removing Externalities: Better

Approach or Not

As there are mainly four types of externalities generated by transportation, we have taken CONGESTION
to demonstrate whether pigovian tax is capable of removing it or not.

Figure2: Congestion Charges

The figure represents the case of congestion for a single road link. The vertical axis represents
the generalized unit cost (or price) of travel, including fuel used, vehicle maintenance, and the
value of time spent traveling. The quantity of travel, represented by the horizontal axis, is
measured in units such as vehicle-kilometers.

26
In the diagram, the average cost curve represents the unit cost of travel as perceived by
individual road users. It is made up of vehicle operating costs (maintenance and fuel) and travel
time costs. Because it is an average cost, its product with the corresponding quantity of travel
gives the total cost incurred by all road users. The marginal cost curve is the derivative of this
total cost with respect to the quantity of travel (the contribution to the total cost of an additional
unit of travel). The vertical distance between the marginal and average cost curves therefore
represents the additional costs imposed on others, but not taken into account by the marginal
road user – that is, the external costs. The demand curve represents the benefit of the marginal
unit of travel.

The current quantity of travel OD is determined by the intersection of the demand and average
cost curves. It results from decisions by road users who take into account only their own private
costs. If the quantity of travel is OD, private costs are equal to the average cost DB. Marginal
external costs of BA imposed on other road users are not taken into account by individual
drivers.

The socially optimal quantity of travel OJ is determined by the intersection of the demand and
marginal cost curves. This quantity is optimal because it avoids travel beyond the point where
social costs exceed benefits. Imposition of a uniform charge of EG on all road users will reduce
travel to the socially optimal level.

Note that congestion is not eliminated if an optimal road user charge is levied; merely reduced in
total value from area LBCN to MGHN. Those whose travel is in the range JD will no longer use
the road because the price is now too high, and will suffer a loss in welfare. But remaining users
gain from reduced delay because fewer vehicles use the road. Overall, the community gains by
the area ABE, which equals the cost to society if nothing, is done to reduce congestion.

27
Benefits Derived

Not only Pigovian taxes correct market failure by reducing externalities to optimal levels,
but the revenue raised offers governments scope to reduce income, payroll and other
taxes.

By reducing taxes on income, payrolls, retail goods, etc, deadweight losses can be
reduced, thus increasing community welfare through increased economic activity. The
congestion charge in figure 1, for example, involves a deadweight loss of area BEF
because some travelers no longer use the road due to the increased cost to them, even
though its overall effect is positive because the item being taxed is a „bad‟ rather than a
„good.

Decision Criteria: Better Approach or Not

“Imposition of Pigovian tax Can Not Be a Better

Approach”

Reasons for non-recognition as a Better Approach

1. It is next to impossible to determine the optimal level of pollution due to difficulty in

measuring the value of the damage and the cost of clean-up.

2.It is also difficult to calculate the level of tax required to achieve it.

3.Recycling tax revenues may be a problem, particularly in the transport sector. In principle,
once a „polluter‟ has been taxed, a social optimum is achieved, and less of the externality is
produced. To subsequently also compensate the victims of the polluter would involve an over-

28
correction of the situation. So, it would be difficult for a government to recycle the revenue
without compensating the victims.

4.One has to develop a tax system such that the government‟s objectives (revenue raising,
distributional objectives and tackling the externalities) can be realized at the lowest cost. Since
transport taxes do not only have an impact on external costs but also raise revenue and have an
impact on distribution, they should be considered within the broader framework of the general
tax system.

29
 Chapter-5

Regulatory Instruments to Control Externalities from the

Transport Sector

General Overview

Regulatory instruments are legal, enforceable, 'command and control' type instruments aimed at
reaching desired, prescribed environmental quality targets or performance standards by
regulating the behavior of individuals and/or firms. In the transport sector, regulatory instruments
induce adjustment of market participants‟ behavior.

1. Fuel economy
standards

2. Emission
standards
Types of Regulatory
Instruments 3. Fuel quality
standards

4. Other
regulatory
measures

1. Fuel Economy Standards

Fuel economy standards refer to standards on vehicle mileage per unit of fuel consumption (i.e.,
km per liter or miles per gallon). These are common ways to control emissions from the transport
sector. Fuel economy standards help increase energy efficiency of vehicles, thereby cutting fuel
demand and associated emissions. While these standards could be effective in reducing fuel
demand and emissions, they do not help in reducing congestion. Fuel economy standards also
reduce emissions indirectly by cutting fuel consumption in the supply chain, such as crude oil
drilling and production, pipeline and oil refinery.

30
2. Emission Standards

Emission standards are aimed at directly reducing emissions, the exhaust coming out of the tail
pipes of vehicles. These standards are different from fuel economy standards because they
directly control emissions from vehicles, whereas the latter reduce emissions by reducing fuel
demand. Fuel economy standards are aimed mainly at reducing fuel consumption and
greenhouse gas (GHG) emissions; however, emission standards control local air pollutants, such
as suspended particulate matters (SPM), carbon monoxide (CO), volatile organic compounds
(VOCs) or non-metallic organic compounds (NMOC), oxides of nitrogen (NOx), etc.

3. Fuel Quality Standards

Fuel quality standards refer to limits on the content of substances that cause environmental
pollution, such as sulfur and lead, in fuel. In order to control emissions of lead and sulfur from
vehicular sources, the best approach is to remove these elements from fuels before burning.
Regardless of the age or state of repair, lead emissions from all gasoline-fueled vehicles can be
eliminated by discontinuing the addition of lead to gasoline. Likewise, emissions of oxides of
sulfur (SOx)) can be abated by reducing the sulfur contents of fuels.

4. Regulatory Measures

Several other regulatory measures may be experimented with to varying degrees of success. For
example, access bans, or partial and total vehicle bans.

Government Preference of Regulatory Instruments over Taxation

Despite the central role played by Pigouvian taxes in economic theory, governments tend not to
make widespread use of environmental taxes. Most prefer to pursue their environmental

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objectives through command and control measures, such as performance standards or mandated
technologies, licenses, permits, zoning regulations, registration, and other regulations. The
reasons are discussed here:

The application of environmental taxes will tend to reduce the incomes of the owners of the
factors of production which are involved in the production of goods which create the negative
environmental externality. The resulting increase in the relative prices of environmentally-dirty
goods will also affect the distribution of gains and losses to consumers if households differ in
their preferences for these goods (some households place a higher value on the environment than
others). There may be no other fiscal measure (e.g. transfers) available to the government to
correct for the distributional effects of the environment tax.

Perhaps the most important reason why governments use command and control measures instead
of Pigouvian taxes is the cost of monitoring and enforcement. Calculating the Pigouvian tax rate
is not a straightforward exercise. It requires knowledge of the cost of the pollution (monetary
value of the increase in mortality or morbidity) at the optimal level of production. Command and
control measures, such as mandated technologies, are much easier to monitor and enforce.
Requiring that all motor vehicles be fitted with catalytic converters and enforcing this
requirement through the motor vehicle registration system is far simpler than taxing emissions
from motor vehicles.

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 Chapter-6

Regulatory Instruments in Bangladesh

Fuel economy standards, emission standards, fuel quality standards and I/M programs are not
mutually exclusive and they are introduced for different purposes. Different countries could give
priority to different measures depending upon their needs and institutional capacity to enforce
the standards. Since most developing countries are particularly concerned about local air
pollution, they are found to prioritize the introduction of emissions standards and fuel quality
standards over fuel economy standards.

Bangladesh, as a developing country uses emission standards and different regulatory measures
to deal with the transportation externalities.

Emission Standards in Bangladesh

Bangladesh has formulated emission standards for vehicles under the Environment Conservation
Rules 1997. The new standard has been notified in 2005. Bangladesh government has taken step
towards controlling vehicle emissions, introducing its own set of emission standards to come into
effect immediately. The standards, Bangladesh-1 and Bangladesh-2, are based on Euro
standards, and will be applied to existing vehicles, regardless of fuel type, as well as vehicles
sold from this point on. One of the emission standards is the introduction of CNG. CNG was
selected based on anticipated lower emission levels relative to the fuels used at the time and the
presence of extensive natural gas reserves in the country. Research had shown that CNG-
operated cars for instance emit around 10-20% less carbon dioxide, up to 25% less nitrous oxide,
and 80% less carbon monoxide, non-methane hydrocarbons and other smog-forming emissions
in comparison to a modern catalyzed gasoline car. It is reported that about 200,00 vehicles have
switched to CNG, including over 6000 buses and 8000 minibuses that used to run on the diesel
and accounted for 57% PM emissions in the city. Other benefits derived from CNG.

Low Costs Gasoline (100% Octane ) price is Taka 67 per Liter in Dhaka. Diesel for heavy duty
engines is Taka 40 per Liter in Dhaka and the price of CNG per meter-cube is Taka 8.50 which

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costs less than others.

Safety Since CNG is lighter than air, it dissipates quickly into the atmosphere rather than
forming hazardous pools, as liquid fuels do. Also, CNG ignites at much higher temperature than
gasoline, making inadvertent ignition less likely. The CNG cylinders are made from 1/2" to 3/4"
aluminum or steel and are much safer than conventional petrol tanks, which are made of thin
sheet metal.

Fuel economy CNG has been found to yield a five percent improvement in fuel economy, as
compared to petrol, resulting in lower fuel costs and reduction in toxic emissions.

Lower maintenance cost As CNG burns very cleanly, spark plugs and lubricants require fewer
changes and tune-ups aren't needed as often. Engines burning CNG will last two to three times
longer than those using petrol. Also, since CNG does not contain any lead, spark plug fouling is
completely eliminated.

Figure3: CNG vs. Non-CNG vehicles and their emissions

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Other regulatory measures Taken by Bangladesh Government:

1. Banning 20 years old cars

2. Banning smoky baby taxis
3. Creating public awareness on air pollution through media such as videos, booklet etc.
beside radio and television programme.
4. Encouraging people to use Compressed Natural Gas (CNG) or Liquid Petroleum Gas (LPG),
driven vehicles, etc.;
5. Saving the forest and promoting plantation within the city limits for ecological
balance;

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 Chapter-7

Recommendation

Dhaka City is not the mere capital of Bangladesh; it is something more than that. It‟s the heart of
country, both economically & structurally. People from all corners of the country are coming in
great force in it. And the number is increasing at an increasing rate. This makes Dhaka more
congested, raised public demand for transportation. So Dhaka is becoming more exposed to
negative externalities of transportation system. On this state we formulated a set of measures that
should be taken as early as possible to save our loving city & our life from the curse of negative
externalities. These are sorted below one after another,

We need an integrated approach to reduce impact of negative externalities created in

transportation system.

Integrated approach should combine all possible solutions, like tax imposition,
regulations, public awareness (social custom) etc.

Government as well mass people, along with vehicles owner, drivers & helpers should
work jointly. All of them should understand that it is for their well beings.

Tax rates should be restructured, it should not only on cylinder capacity (CC) basis, and
weight should also give to carbon emission quantities.

Mass transportation system should be developed more, people should also encouraged
using their feet as it don‟t create any negative externality.

There are different series of cars; it will be helpful if government banned any series on a
particular day, like series “A” on Sunday, series “B” on Monday.

There should be a general database about the detail information of vehicles‟, like
category, owner, and license maturity etc.

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Conclusion:

We want to see Dhaka as world‟s one of the top city. To fulfill our desire steps need to taken
now. Government should lead this process where all other stakeholders are essential parties
to accomplish this task. Environmental hazard can lead to us into great disaster as all things
are liked in ecosystem. Collapse in one sector can bring disaster in other. We cannot make
our beloved Dhaka city less attractive to stop people‟s flow. We have to modernize our
transportation system to cope up with demand of new generation. So we should handle
negative externalities with modern approaches.

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References:

1. Public Finance by Harvey S Rosen.

2. Economics of the Public Sector by Joseph E. Stiglitz.

3. Bangladesh Road Transport Authority (BRTA).

4. National Broad of Revenue (NBR).

5. Bangladesh Poribesh Andolon (BAPA).

6. Bangladesh University of Engineering & Technology (BUET).

7. www.bapa.org.bd

8. www.brta.gov.bd

9. www.nbr-bd.org

10. www.buet.ac.bd

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