Consider two groups of citizens, each group can either choose to drive x = d or to take public transport x = p. The first group, group 1, enjoys driving and has the following 3 benefit from using their car within the ULEZ area: B1(x1 = d) = 18. The second group, group 2, does not enjoy driving and has a benefit of B2(x2 = d) = 0 from driving their car. If they don’t drive, citizens can use public transport to get around. The benefit of doing so is the same for both groups: B1(x1 = p) = B2(x2 = p) = 10. Both groups drive cars that do not meet the ULEZ requirements and therefore create excessive pollution. For simplicity, we consider that pollution, and the health problems it induces, are the main cost of driving. This cost is imposed on both groups and is equal to Ci(x1 = d, x2 = d) = 10 if both groups drive, Ci(x1 = p, x2 = d) = Ci(x1 = d, x2 = p) = 5 if only one group drives and Ci(x1 = p, x2 = p) = 0 if neither group drives, where i represents either group 1 or group 2. The utility of each group from choosing action xi is equal to the benefits minus the costs: Ui(xi , xj ) = Bi(xi) − Ci(xi , xj ), where i ∈ {1, 2}. A) Suppose now that ULEZ is introduced so that citizens have to pay a fee equal to τ = 12.50 to drive. The benefit of driving is therefore now reduced to B1(x1 = d) = 18 − 12.50 = 5.5 for group 1 and B2(x2 = d) = 0 − τ = −12.50 for group 2. Does group 1 prefer to drive or take public transport? Does group 2 prefer to drive or take public transport? Calculate the social welfare after ULEZ has been implemented, that is compute S = U1(x1, x2)+U2(x1, x2) given the optimal choice of transportation of each group when τ = 12.50. B) Discuss carefully how welfare changes when the ULEZ policy is introduced. Is the social welfare higher under the ULEZ policy than without it? Which group benefits from the policy and which group is harmed by it? How does the cost of pollution C(x1, x2) change when the policy is introduced? What is the intuition behind these changes? We now want to understand how to measure the impact of the policy. If the policy is effective in reducing driving, then pollution should go down. In the model, we captured the effect of the choice of transportation on pollution with the function C(x1, x2). In practice, the actual reduction in pollution can only be known after the policy is implemented. ) Suppose that you had data on the amount of pollution in London every year. Write down the regression equation that you would need to estimate to measure the effect of ULEZ on pollution. Describe carefully what the dependent variable, the independent variable, the unit of observation (time or location), and the main coefficient of interest are. What control variables do you think should be included in this regression? ) Explain carefully why running the regression above might suffer from endogeneity concerns: are their any unobservable variables that might confound the results? Should we be worried about reverse causality? What empirical methods could we use to address these concerns? Finally, we are ready to draw our conclusions on the main aspect of the policy. ) Discuss how our model, and the evidence we could get to test it, help us understand the debates around the introduction of ULEZ. You should focus in particular on the issues raised in the BBC article attached. You should also discuss the limitations of the model and conclude with your personal view on the policy (supporting this view with your analysis
Consider two groups of citizens, each group can either choose to drive x = d or to take public transport x = p. The first group, group 1, enjoys driving and has the following 3 benefit from using their car within the ULEZ area: B1(x1 = d) = 18. The second group, group 2, does not enjoy driving and has a benefit of B2(x2 = d) = 0 from driving their car. If they don’t drive, citizens can use public transport to get around. The benefit of doing so is the same for both groups: B1(x1 = p) = B2(x2 = p) = 10. Both groups drive cars that do not meet the ULEZ requirements and therefore create excessive pollution.
For simplicity, we consider that pollution, and the health problems it induces, are the main cost of driving. This cost is imposed on both groups and is equal to Ci(x1 = d, x2 = d) = 10 if both groups drive, Ci(x1 = p, x2 = d) = Ci(x1 = d, x2 = p) = 5 if only one group drives and Ci(x1 = p, x2 = p) = 0 if neither group drives, where i represents either group 1 or group 2. The utility of each group from choosing action xi is equal to the benefits minus the costs: Ui(xi , xj ) = Bi(xi) − Ci(xi , xj ), where i ∈ {1, 2}.
A) Suppose now that ULEZ is introduced so that citizens have to pay a fee equal to τ = 12.50 to drive. The benefit of driving is therefore now reduced to B1(x1 = d) = 18 − 12.50 = 5.5 for group 1 and B2(x2 = d) = 0 − τ = −12.50 for group 2. Does group 1 prefer to drive or take public transport? Does group 2 prefer to drive or take public transport? Calculate the social welfare after ULEZ has been implemented, that is compute S = U1(x1, x2)+U2(x1, x2) given the optimal choice of transportation of each group when τ = 12.50.
B) Discuss carefully how welfare changes when the ULEZ policy is introduced. Is the social welfare higher under the ULEZ policy than without it? Which group benefits from the policy and which group is harmed by it? How does the cost of pollution C(x1, x2) change when the policy is introduced? What is the intuition behind these changes?
We now want to understand how to measure the impact of the policy. If the policy is effective in reducing driving, then pollution should go down. In the model, we captured the effect of the choice of transportation on pollution with the function C(x1, x2). In practice, the actual reduction in pollution can only be known after the policy is implemented.
- ) Suppose that you had data on the amount of pollution in London every year. Write down the regression equation that you would need to estimate to measure the effect of ULEZ on pollution. Describe carefully what the dependent variable, the independent variable, the unit of observation (time or location), and the main coefficient of interest are. What control variables do you think should be included in this regression?
- ) Explain carefully why running the regression above might suffer from endogeneity concerns: are their any unobservable variables that might confound the results? Should we be worried about reverse causality? What empirical methods could we use to address these concerns? Finally, we are ready to draw our conclusions on the main aspect of the policy.
- ) Discuss how our model, and the evidence we could get to test it, help us understand the debates around the introduction of ULEZ. You should focus in particular on the issues raised in the BBC article attached. You should also discuss the limitations of the model and conclude with your personal view on the policy (supporting this view with your analysis
USE THESE WEBSITES-
://researchbriefings.files.parliament.uk/documents/CBP-9816/CBP-9816.pdf
https://www.bbc.co.uk/newsround/66646493
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