This article ​‘​Stuttgart: Germany's 'Beijing' for air pollution?

’ was published on
20th January 2016 by Brigitte Osterath. It is about the increasing pollution
because of emission of harmful gases by the car in Stuttgart, a german city. In
economic view, this is a negative externality of consumption.

Negative externality of consumption refers to the external cost created by the

consumer. According to the article, by the consumption of excessive car there
is the emission of harmful gases in the air. It is causing air pollution which
affects the health of people living in the society. So this is an external cost that
spill over onto society in the form of cost to the non-consumers of cars.

The graph above illustrates the external cost produced in society by the
excessive consumption of demerit good i.e. car in Stuttgart. As there is a
negative externality of consumption of cars, marginal private benefit(D=MPB)
gained by the car consumers doesn’t reflect marginal social benefit obtained by
the society i.e. D=MSB. So, there is less MSB and it lies below the D=MPB
curve. The vertical difference between the D=MPB and D=MSC gives the
external cost that is beared by the society because of the consumption of cars.
As this is a negative externality of consumption there is not any effect on the
supply curve and hence S=MPC=MSC. The market of car in Stuttgart
determines the equilibrium quantity Q1 and price P1 at the intersection of
D=MPB and S. But the socially optimum is the intersection of D=MSB and S
with equilibrium quantity, Q and price, P.
As this is the failure in market of cars in Stuttgart and the non-consumers are
bearing the external negative cost, the government tries to “soft” appeal the
consumer to control the use of cars i.e. persuasion. It is a method used by the
government to clear the external cost.
Government is publishing data of pollution in Stuttgart and appealing people
to control the consumption of cars. But it is not being effective as there is no
possible alteration to control the use of cars. The government can encourage
the use of public vehicles but it includes opportunity cost as the government
has to invest for the buses and public transport which could have been
invested for other merit goods is Stuttgart. Also, the people are so dependent
on there private transport there would be minimum use of public transport i.e.
it wouldn’t be efficient. By observing the negative effect caused by the cars,
environmentalists are suggesting to ban the excessive use of cars by
implementing government policies which is also a possible solution to prevent
or limit the use of cars in Stuttgart which automatically helps to correct the
external cost beared by the society. Banning of car creates the decrease of
demand in the car market of Stuttgart which results in a decrease of
consumption of car and tends to correct the negative externality. But there is
an opportunity cost to the government as it has to provide other alternatives to
replace the banning. Also, there is a reduction in producer revenue as
government creates the ban on cars because of the decrease in demand. Many
big companies like Porsche and Daimler have their headquarters in Stuttgart
and creating a ban results in a decrease of the government revenue too.
Adding to this, Stuttgart is referred to as the ‘City of Cars’ and creating a ban
results in the elimination of this status which indirectly affects the
stakeholders. So banning will possibly fail to prevent the negative effect caused
by the consumption of cars in Stuttgart.
Because of the failure of the suggested possible solution to control the negative
externality of consumption, there will be the continuous negative effects on the
society. Government can still apply the other methods like imposing indirect
tax and imposing tax on consumers but they also have opportunity cost which
is beared by different stakeholders. On the contrary, as the government applies
possible solution minimising the opportunity cost there would be control of
pollution i.e. the negative externality of consumption of cars in the ‘Car city’,
Stuttgart in Germany.