1) Policy goal

Reducing gasoline consumption

Two approaches:
A. Enact regulations requiring automakers to produce more fuel-
effecient vehicles
B. Significantly raise the gas tax
Discuss the merits of each approach. Which do you think would
achieve the goal at lower cost? Who do you think would support or
oppose each approach?

The issue of reducing gasoline consumption has become a pressing concern due to its
environmental, economic, and geopolitical implications. As policymakers grapple with finding
effective solutions, two main approaches have emerged: (A) enacting regulations to compel
automakers to produce more fuel-efficient vehicles and (B) significantly raising the gas tax. This
discussion will delve into the merits of each approach, examining their potential effectiveness
in achieving the goal of reducing gasoline consumption and considering the associated costs.
Furthermore, it will explore the potential supporters and opponents of each approach.

Explanation
Approach A: Enact Regulations on Automakers

One approach to reducing gasoline consumption is to establish regulations that require

automakers to produce more fuel-efficient vehicles. This strategy is aimed at addressing the
source of problem, not at the consumer, but at the vehicle itself. By setting higher fuel
efficiency standards, policymakers are striving to develop and introduce cleaner and more
sustainable modes of transportation.

Merits:
I. Long-term impact: Regulations could have a lasting impact on the automotive industry
by encouraging manufacturers to invest in research and development of fuel-efficiency
technologies. Over time, gasoline consumption can be significantly reduced.

II. Systemic change: Mandatory fuel economy standards require automakers to prioritize
innovation and produce vehicles that meet sustainability targets. This approach can
promote the widespread adoption of fuel-efficient technologies and benefit both the
environment and consumers.

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 III. Leveling the playing field: By imposing regulation on all automakers, the burden would
be shared evenly, preventing some from producing cheaper, less fuel-efficient vehicles
and gaining a competitive advantage.

Cost Considerations:
I. Compliance costs: Automakers can incur significant costs such as research and
development costs and production processes changes to meet new regulations. These
costs could potentially passed on to consumers through higher vehicle prices.

II. Technological limitations: Due to strict regulations, it may be necessary to use advanced
technologies that are still in the early stages of development. The associated costs and
feasibility of implementing these technologies at scale should be carefully evaluated.

Supporters and Opponents:

Supporters of this approach are likely to include environmental organizations, clean energy
advocates, and individuals concerned about climate change. They see regulations as an
effective way to drive the transition to a more sustainable transportation sector. However,
automakers and industry associations may oppose these regulations due to concerns over
profitability, market competitiveness, and the potential impact on jobs.

Approach B: Significantly Raise the Gas Tax

Another approach to reducing gasoline consumption is to raise the gas tax, effectively
increasing the price of gasoline. This strategy aims to influence consumer behavior by
increasing the price of gasoline and motivate individuals to seek alternatives such as using
public transportation or purchasing a more fuel-efficient vehicles.

Merits:
I. Immediate impact: Higher gasoline taxes will quickly drive higher prices, prompting
consumers to consider alternative modes of transportation or more fuel-efficient
vehicles.

II. Revenue generation: Raising the gas tax can generate significant revenue that can be
directed towards developing sustainable transportation infrastructure, supporting public
transit systems, and funding research and development for cleaner energy alternatives.

III. Cost-effectiveness: Compared to regulatory approaches, raising gasoline taxes can be a

relatively cost-effective strategy. It depends on the market mechanisms and does not
require large-scale government intervention or constant monitoring.

Cost Considerations:
I. Regressive impact: Higher gas tax disproportionately affects low-income individuals as
they spend a larger portion of their income on transportation expense. Policymakers to

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 consider implementing measures to mitigate the reversibility of this approach, such as
providing subsidies to low-income households.

II. Political feasibility: Increasing tax is directly affect people’s wallets, they often face
resistance from the people. Policymakers need to overcome potential opposition and
build public support for this approach through effective communication and
demonstrating of the benefits of reduced gasoline consumption.

Supporters and Opponents:

Supporters of raising the gas tax may include policymakers seeking a revenue stream for
sustainable transportation initiatives, environmentalists advocating for reduced carbon
emissions, and proponents of a market-based approach to incentivizing change. Opposition
may come from individuals who rely heavily on gasoline-powered vehicles, industry groups
representing the oil and gas sector, and some conservative politicians who oppose tax
increases.

In Conclusion, both provided a potential path to reducing gasoline consumption by regulating

automakers to produce more fuel-efficient vehicles and significantly raising the gas tax.
Regulatory measures may drive long-term systemic change within the automotive industry, but
rising the gas tax presents an immediate market-based solution.

The choice between the two approaches depends on various factors, including political
feasibility, economic considerations, and social equity concerns. To achieve the goal of reducing
gasoline consumption at a lower cost, a comprehensive strategy that combines elements from
both approaches while addressing their respective drawbacks may be the most effective
approach.

2) Brain Stroming

Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at
$100,000.
A near factory pollutes the lake water, and would have to pay $50,000 for non-
polluting equipment.
A. Describe a Coase-like private solution
B. Can you think of any reasons why this solution might not work in the real
world?

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(A) It has been stated that the 1,000 residents of Green Valley value swimming in Blue Lake at
$100,000.

However, a nearby factory pollutes the lake. The factory can install an equipment at cost of
$50,000 to control pollution.

Coase Theorem is a theorem that indicates the framework to reduce negative externality
through negotiations between parties provided that transaction cost to negotiation is zero.
Such negotiation can lead to socially optimal outcome irrespective of whoever has the property
rights.

Factory needs at least $50,000 to install the non-polluting equipment.

Residents get benefit of $100,000 by swimming in unpolluted lake.

So, if both parties negotiate with zero transaction cost then residents of Green Valley can give
an amount between $50,000 and $100,000 to factory to install non-polluting equipment and
can get the pollution eliminated, even though, factory has right to pollute the river.

(B) The solution provided in part (a) might not work in real world because lake is a common
resource and, therefore, no resident can be excluded from swimming in the lake.

In such scenario, residents have an incentive to free ride instead of making payment to keep
lake unpolluted.

Such free riding behavior would result in lack of sufficient funds being collected to pay the
factory to induce it to install non-polluting equipment.

So, in real world, lake would remain polluted.

i. The Coase like private solution is that residents of Green Valley pays an amount
between $50,000 and $100,000 to factory to install non-polluting equipment and keep
the lake unpolluted.

ii. This solution might not work in real world because of free riding behavior of people in
respect to a common resource.

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