Elasticity Estimates for Policy Options to Reduce Air Pollution Emissions from M

Question

Elasticity Estimates for Policy Options to Reduce Air Pollution Emissions from Motor Vehicles Elasticity of Fuel consumption with respect to fuel price Vehicle travel with respect to fuel price Vehicle trips with respect to parking fees Estimate RangeElasticity Type -0.18 to -1.0 Own price -0.1 to -0.26 Cross price -0.05 to -0.30 Cross price to new vehicle price-0.6 to -o Using the elasticity data from above, choose one policy to reduce air pollutants from motor vehicles and show how effective it would be. Use economic arguments to support your answer

Explanation / Answer

Since fuel consumption is highly elastic to fuel price (as it is close to 1), the best way to reduce emissions is to reduce fuel consumption is by raising fuel prices as fuel consumption is highly sensitive to fuel prices.

Thus, the best way to reduce emissions is to increase fuel prices.

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