Qopt And Popt Analysis

The article discusses the possible future restriction on fossil fuel cars in China to encourage the consumption of electric vehicles. Fossil fuel cars have a negative externality, meaning the side-effects on the third party involve costs, so they are demerit goods. Since the exhaust gases contain carbon dioxide, carbon monoxide, and nitrogen oxides, the overconsumption of fossil fuel cars will hurt the environment and people’s health. The negative consumption externality leads to market failure, where allocative efficiency is not achieved.

The market has its equilibrium point at Qm and Pm, but the social optimum point is Qopt and Popt. The marginal social benefit is less than the marginal social cost, so the market failure

China is believed to be the largest automotive market in the world, which enjoys the sale of 25.84 million cars in the year of 2017. Such large consumption indicates that the needs for gasoline are enormous, resulting in many oil extraction that harms the local community. The burning of the fuel also exhausts toxic gasses and global warming emissions, causing environmental problems and pollutions. Moreover, when cars get used, they emit other air pollutants, which again worsen the local environment as well as the public health condition. Illnesses, like asthma and cancer, are proven to relate to carbon emission. Welfare loss is, therefore, composed of those side effects.

In the diagram above, the consumer of fossil fuel cars have a demand curve, MPB, but when driving them, they create external costs for the environment and other people’s health. These costs can be considered as ‘negative benefits,’ which cause the MSB curve to lie below the MPB curve. The external cost is shown on the graph by the vertical difference between MPB and

Although the government regulation is simple and can be implemented efficiently, the reduction in production may cause unemployment in the labour market. Moreover, people get used to driving the fossil fuel cars, and they are uncertain about the safety conditions and other features about the substitutes electric cars. Nowadays, electric vehicles face doubt like whether their power is enough to reach as high as the speed of fossil fuel cars. Furthermore, due to the short battery life, the driver sometimes need to find emergency charging pile, but this facility is apparently far from sufficient in cities. If the government decide to ban the fossil fuel vehicles, it has to pay a significant amount of money on equipping the charging plant. Based on the all the concerns listed, the effect of direct government regulation may not be