Macro and Micro Analysis of Petrol Market - Essay Example

?Macro And Micro Answer As a result of the prevalence of greater number of accidents on the road of Poland, due to many factors, people are less attracted to travel by road. This is greater number of road accidents creates greater fear for the people of getting injured or even dead. This creates a negative externality in the petrol market of the country (Hultkrantz and Lindberg, 2011, p. 3). In this context, use of alcohol creates the significant amount of negative externality to the users. Alcohol is regarded as an attractive goal of public tax collectors due to the fact that extreme alcohol consumption generates negative externalities (Gillespie, 2007, p. 105). The amounts of external costs incorporate the direct physical, psychological, as well as emotional damage to others. Along with this, treatment costs are sometimes borne by the third parties (who are directly affected by the Alcohol consumption) by means of private or public insurance. It has been estimated by researchers that the total amounts of costs associated with the alcohol consumption resulting from welfare as well as health services, and also from insurance, enforcement, as well as penal costs and also from loss of costs of production accumulate to the total social cost by the amount of 1–3% of GDP in different European countries, including Poland. These amounts of loss of GDP by creation of negative effects of car accidents on the generation of greater amount of social costs are creating negative externalities to the people of the country (Bielinska-Kwapisz and Mielecka-Kubien, 2010, p. 1). As an outcome of the higher level of road accidents people are getting scared of traveling by road and thus they are expected to demand lesser amount of petrol. This reduces the demand for oil given the price of the petrol. Hence, the demand curve for petrol will shift down from AD1 to AD2 (Figure 1). Thus the equilibrium market price of petrol will fall and the producers will end up producing lesser amounts of output, selling at lower level of price and thus making lesser amount of profit. This also hampers the consumers by reduction in the amount of sales tax generated from the sales of petrol. This reduction in tax earning of the government reduces the amount of government spending on the development of road infrastructures and creates the negative externality to the consumers (Veal, 2002, p. 190). The externality is considered to be negative due to the fact that greater levels of accidents by some of the consumers to lack of proper road protections and infrastructures, which are to be implemented by the government, consumers are getting worse off. And also this fact is regarded as externality because of the fact that the generation of greater amount of negative effects upon the utility level of the consumers has not entirely been reasoned with the inefficient behavior of the people, in general. Rather these negative effects are largely generated by the lack of efficient government intervention into the process of development of higher degree of secured and well-protected road infrastructure Batta, 2008, p. 81). However this negative externality is also related to the misbehavior of the consumers of alcohol also. Greater accidents are made by the drunken car drivers for which the innocent people are paying the price in terms of their lives. This fact is also regarded as the negative externality to a large number of people (Bielinska-Kwapisz and Mielecka-Kubien, 2010, p. 5). Figure 1: Negative externality in the Petrol market Answer 2: Figure 2: Tax on petrol and reduction in negative externality The level of negative externality can easily be removed with the help of greater level of tax imposed on the petrol consumption. This higher level of tax on the purchase and use of petrol will increase the amount of tax revenues earned by the government of the country under consideration. This higher volume of tax revenues will thus give the government of the country to make higher amount of public expenditure on the development of road and as well as transport system of the country (King and Inderwildi, n.d., p. 42). This greater tax revenue will also induce greater amounts of public spending on the development of road protection technologies implemented in the country. This will reduce the cases of road accidents made in the country by people driving after heavy drinking. Thus the number of accidents in the country will easily be reduced (Mankiw, 2008, p. 217). Apart from this effect, there will be a direct price effect of the policy of imposition of greater amount of tax on the per unit purchase of petrol in the country. Due to the existence of greater amount of tax on the per unit consumption of petrol in the country, car users will be tempted to reduce their demand for petrol and thus the amount of petrol supplied by the producers will be reduced (Weizsacker et al., 2005, p. 92). The demand curve, after the imposition of tax on petrol will shift down from AD1 to AD2 and this will reduce the market equilibrium price from P1 to P2 (Figure 2). However, since the demand for petrol is relatively elastic, therefore the imposition of tax will generate greater amount of tax revenue to the government. This imposition of tax will reduce the demand for petrol by those consumers who are addicted to drive after consuming alcohol. Hence, the number of road accidents will reduce and the society will be better off having lower amount of negative externality (Mankiw, 2008, p. 217). Answer 3: The tax solution to the negative externality created by the lack of proper level of protection on the roads of the country is related to the effective taxation on the number of road accidents made by the people of the country. If people (or more technically, each car) are (is) taxed according to the absolute number of road accidents, then there can be two positive effects upon the process of generation of greater level of positive utility for the consumers. On one hand, due to the prevalence of greater level of tax on the number of road accidents made by each car, people will be tempted to drive slowly or atleast they will avoid driving their cars after consuming alcohol. This fact will reduce the absolute number of road accidents in the country and will also help increasing the level of awareness in the country (Riley, 2006, p. 44). The second effect is related to the fact that greater level of tax will increase the cost of these people of driving on the road, particularly on those roads of the part of the country where the probability of car accidents are very high. Hence, people will either avoid the driving after consuming alcohol or they will demand greater level of road protection from the government. Hence, people will not reduce the demand for petrol and thus the amount of government tax revenue will not be reduced. This greater tax rates will also give the government a chance to earn higher amount of tax income from the people which can further be used as the expenditure process on the development of greater degree of safety or precautionary aspects of roads across the country (Case, 2007, p. 337). As an outcome of greater level of tax imposed on the number of road accidents made by each car, the demand curve for each car in the petrol market of the country will not change and therefore the demand curve and the supply curve will not shift in the market for petrol. Thus the amount of output produced and sold will remain constant in the market. In this way the amount of negative externality will be reduced in the petrol market of the country (Case, 2007, p. 377). Large numbers of heaviest cars or vehicles in various studies have been “Sport Utility Vehicles” or the minibuses having the geometry as well as stiffness which vary from the ordinary passenger cars in countries across the globe. While calculating the tax rates these width and length of the cars needed to be measured and taken into account. The larger the size of the car, the larger is the probability of accidents and thus the larger should be the amount of tax. One part of the impact of mass predicted in these studies might thus be due to the existence of stiffness of cars. Providing the association between the level of stiffness and the mass is regarded as constant between wide ranges of car models this fact is considered as a negligible problem in the process of setting the accurate premium tax. This aspect required to be additionally investigated when a weight dependent on the premium tax must be introduced by the government of Poland (Hultkrantz and Lindberg, 2011, p. 20). Figure 3: Tax and reduction in negative externality References: Batta, R. N. (2008), Economics Of The Road Transport, USA: Gyan Publishing House Bielinska-Kwapisz, A. and Mielecka-Kubien, Z. Alcohol Consumption and Its Adverse Effects in Poland in Years 1950–2005, Hindawi Publishing Corporation Economics Research International, Vol. 2011, pp. 1-13, retrieved on May 7, 2012 from: http://downloads.hindawi.com/journals/econ/2011/870714.pdf Gillespie, A. (2007), Foundations of Economics, UK: OUP Hultkrantz, L. and Lindberg, G. (2011), Accident cost, speed and vehicle mass externalities, and insurance, INTERNATIONAL TRANSPORT FORUM, retrieved on May 7, 2012 from: http://www.internationaltransportforum.org/jtrc/DiscussionPapers/DP201126.pdf King, D. A. and Inderwildi, O. R. (n.d.), Future of Mobility Roadmaps, USA: SSEE Mankiw, N. G. (2008), Principles of economics: Volume 1, USA: Cengage Learning Riley, G. (2006), OCR AS Economics, Course Companion, USA: Tutor2u Limited Veal, J. A. (2002), Leisure and tourism policy and planning, USA: CABI Weizsacker, E. U. et al., (2005), Limits to Privatization: How to Avoid Too Much of a Good Thing : a Report to the Club of Rome, USA: Earthscan Read More