Economics Ib Ia Example Essay

The carbon dioxide from airplanes accounts for about 3 percent of the world’s greenhouse gas emissions, a share projected to go up as air traffic rises. The European Union is now requiring airlines that fly into or out of Europe to pay a fee for these emissions. This is a smart response to an urgent problem. The United States and the other nations opposing the program should either come up with a better idea — soon — or drop their objections. Under the scheme, essentially a cap-and-trade system, airlines will be given an emissions ceiling and allocated permits.

They will have to buy new permits only if they exceed the ceiling. This will put a premium on operating more efficiently. And Europe’s hope is that it will avert any increase in emissions and lead to a modest drop, beginning with a 3 percent cut this year compared with a 2004-6 baseline. The United States, Russia, China and 20 other nations opposed to the plan met in Moscow last week to plot a response. Though no specific actions were agreed, there was much belligerent talk, and even a list of possible retaliatory actions, including levies on European-based airlines that fly internationally.

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Russia suggested that it might withdraw permissions for European airlines to fly over Siberia on routes from Europe to Asia. For the sake of their own financial survival, many airlines are trying to become more efficient. But like the power industries, many of which have vociferously resisted cap and trade, they want to change on their own schedule, and without the threat of penalties. Governments are clearly listening to their airlines. Many, notably Russia and China, also bristle at what they see as an insult to their sovereignty.

The Obama administration says it would prefer a global agreement under United Nations auspices. That would be great. But Europe argues, with some justification that talks aimed at such an agreement have been going on fruitlessly for 15 years, while the problem of climate change continues to grow. It is not yet clear how many airlines, if any, will exceed their allotment, and by how much. Some of them have already added small surcharges — $3 in the case of Delta Air Lines — in anticipation of having to pay something when the E. U. presents the bill. The cost estimates are all over the lot.

The E. U. expects a first-year increase of $2. 60 in the price of a ticket between Europe and China. The International Air Transport Association says increases could be in the $20 to $45 range. Either way, passengers are not looking at charges much greater than what it now costs to check a single bag. This seems a small price to pay for encouraging more efficient airlines and beginning to address global warming. A version of this editorial appeared in print on February 27, 2012, on page A18 of the New York edition with the headline: Airlines, Emissions and Europe’s Sensible Plan.

The article above is dealing with the issue of what is causing air pollution and how to decrease air pollution. When analyzing the article in a deeper matter it is clearly seen that this issues are part of microeconomics as they deal with market failure and negative externalities of consumption. First to define the key terms negative externalities of consumption and why they are a market failure. Market failure is considered to be any way of the market not functioning at all or not functioning well. Not functioning well means that the following things in a market keep occurring: 1. he existence of externalities, 2. Abuse of monopoly power and 3. Inequality in the distribution of income and wealth.

1 Negative externalities of consumption happen when consumption of a good or service has a negative impact on both the consumer and a third party. 2 In the article a negative externality of consumption is the usage, or better said over usage of airplanes as a way of traveling. It is negative because the emission caused by airplanes is equal to 3% of all the greenhouse emissions in the world. This is negative because also the people who are not using the airplanes suffer under the consequences, for example the greenhouse effect causes global warming this increases the average temperature on earth and leads to distortions in agriculture. The following graph will be used for further explanation of negative externalities. 1 2 „Economics from a global perspective“ pg. 165 “Economics Course Companion” pg. 141 Citation from the original article “Airlines, Emissions and Europe’s Sensible Plan”. 3

Equilibrium in the economy is achieved in that point where Marginal Social Cost (MSC) is equal to Marginal Social Benefit (MSB), as seen on the graph. But the point where negative externalities occur is the point where MSB is smaller than MPB. This means that the cost of the society is much bigger than the cost of the individual which is consuming the service of air traveling. Example, the price for an airplane ticket might be 250$ but the price the society has to pay because of the pollution is much bigger, but cannot be measured in concrete money terms.

There are many measures which might be taken for the prevention of such high level of negative externalities, measures such us government interference. This would be imposing of indirect taxes on airplane ticket price or setting tradable permits. The graph bellow will serve for further explanations. The graph above shows what happens if indirect tax is imposed on the airplane ticket. An impose of tax would lead to an increase in price from P1 to P, this shifts the MSC up and therefore makes a shift to the original Qe (equilibrium) point on the Q axis.

This shift means that there is a change in quantity demanded; therefore a fall of airplane usage is present. Another way of decreasing negative externalities caused by airplane traveling is imposing tradable permits. This is the additional value the producers e. g. the airplane companies have to pay. They are set in order to decrease the level of emission. When tradable permits are set than there is a certain level of emission which cannot be crossed, if this level or celling is crossed than the suppliers have to pay additional money.

This was seen in the recent EU solution for air pollution, but unfortunately some countries did not agree on this solution. 4 To sum up, as it already has been seen, to high usage of air traveling can lead to negative consequences such as air pollution and high emission of CO2 and the government can interfere in many ways. It can be done by imposing indirect taxes or setting tradable permits. But that interference does not have to be clearly positive even they can have negative sides. A positive effect of them would be the decreased usage of airplanes; travelers would switch to trains or ships which are much more environmentally friendly.

But imposing taxes can also lead to negative effects on consumers because the price would increase and the consumer would have to spend more money on airplane tickets. Another negative side which might occur while 4 Citation from the original article trying to fix this problem is that small businesses e. g. small, private airplane companies would have to shut down their production because they would lose many consumers. This would lead to the point where they have higher costs of production then the revenue they have. This puts the firm in a minus.