Following the broad overview of potential costs and benefits of the policy, we will nowanalyse the main objective of the policy using an economic model.Consider two groups of citizens, each group can either choose to drive x = d or to takepublic transport x = p. The first group, group 1, enjoys driving and has the following4benefit 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 theircar. If they don't drive, citizens can use public transport to get around. The benefit ofdoing so is the same for both groups: B₁(x₁ = p) = B₂(x₂ = p) = 10. Both groups drivecars 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 themain cost of driving. This cost is imposed on both groups and is equal to C/(x₁d, x₂= d) = 10 if both groups drive, C₁(x₁=p, x₂ = d) = C₁(x₁ =d, x₂ = p) = 5 if onlyone group drives and C₁(x₁ = P, X₂ = p) = 0 if neither group drives, where i representseither group 1 or group 2. The utility of each group from choosing action x; is equal tothe benefits minus the costs: U₁(x₁, xj) = Bi(xi) — Ci(Xi, Xi), where i ¤ {1,2}.=1. Suppose now that ULEZ is introduced so that citizens have to pay a fee equal toT = 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 T-12.50 for group 2. Doesgroup 1 prefer to drive or take public transport? Does group 2 prefer to drive or takepublic transport? Calculate the social welfare after ULEZ has been implemented, thatis compute S = U₁(X₁, X₂) + U₂(x₁, x₂) given the optimal choice of transportation ofeach group when t = 12.50.

Utility is the satisfaction or benefit that a consumer derives from consuming a good or service. It…

Answered: = = 1. Suppose now that ULEZ is…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Following the broad overview of potential costs and benefits of the policy, we will now
analyse the main objective of the policy using an economic model.
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
4
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 C/(x₁
d, x₂= d) = 10 if both groups drive, C₁(x₁=p, x₂ = d) = C₁(x₁ =d, x₂ = p) = 5 if only
one group drives and C₁(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 x; is equal to
the benefits minus the costs: U₁(x₁, xj) = Bi(xi) — Ci(Xi, Xi), where i ¤ {1,2}.
=
1. Suppose now that ULEZ is introduced so that citizens have to pay a fee equal to
T = 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 T-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 t = 12.50.

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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? [Suggested word count: 100 words]

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