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 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)=10ifbothgroupsdrive,Ci(x1 =p,x2 =d)=Ci(x1 =d,x2 =p)=5ifonly 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 thebenefitsminusthecosts: Ui(xi,xj)=Bi(xi)−Ci(xi,xj),wherei∈{1,2}. QUESTION 5. Discuss carefully how welfare changes when the ULEZ policy is in- troduced. 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]
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
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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)=10ifbothgroupsdrive,Ci(x1 =p,x2 =d)=Ci(x1 =d,x2 =p)=5ifonly 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 thebenefitsminusthecosts: Ui(xi,xj)=Bi(xi)−Ci(xi,xj),wherei∈{1,2}.
QUESTION
5. Discuss carefully how welfare changes when the ULEZ policy is in- troduced. 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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