Microeconomicsassignment Assignment

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The United Nations’ conference on Climate Change is a clear example Of importance that environmental policies are taking on the political agenda. Within the sectors that make up the economy, road transport is a significant contributor to total greenhouse gas emissions, such as carbon dioxide (CO). And obviously, the automobile industry has close relationship with the situation. In regard to public policy, two main approaches have been implemented to treat this negative externalities: emissions tax, both to car sales and to gasoline prices, and emission thresholds to new car production.

With this background, we hose the new cars industry in this essay to construct a model to explain firm decisions and industry market outcomes for prices and quantities of output. And we apply the model we construct to the effect of missions tax on CO pollution and the regulation to reduce CO pollution. 2. Model 2. 1 new cars industry market background The new cars market consists of the initial retail sale of passenger cars. The market value is calculated at retail selling price (RSVP) and the market volume is given in terms of units sold.

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Any currency conversions used have been calculated at constant 201 0 annual average exchange rates. For the purposes of the report, Asia-Pacific comprises Australia, China, Indonesia, Japan, New Zealand, Singapore, South Korea, Taiwan and Thailand. The new cars market will be analyze taking car manufactures as players. The key buys will be taken as consumers and fleet operators, and suppliers of commodity items, such as metals as the key suppliers. It is reported that the market value of Asia-Pacific new cars market grew by 152% in 201 0 to reach a value of \$443. Billion and by 14. 8% in 2010 to reach a volume of 21. 4 million units. To simplify the calculation, the models showed in this essay use the thousand dollars to lactate the value and million units to represent the volume. 2. 2 demand and supply model To construct a model to explain firm decisions and industry market outcomes for the prices and output, we firstly simplify the reality that contains only its most important features to make predictions for it is too complex to analyze fully of the industry.

According to industry profile in new cars done by the Denominator , we construct the demand functions of new cars industry is: Where Q is quantity of new cars demanded in million units, p is the price of new cars in thousand dollars, As is the price of substitute in thousand dollars I. E. Other substitute vehicles, second-hand cars etc. ), and Y is the income of consumers in thousand dollars. This expression shows that the amount of new cars demanded varies with the price of new cars, the price of substitutes and the income of consumers.

Figurer-1 Where Q shows the million units of demand, and P shows the price with the unit of thousand dollars. After knowing how much consumers want is not enough. It only tells us what price and quantity are observed in a market. We also need to know how much firms want to supply at the given price to determine the market price ND the quantity. A lot of factors need to be considered to construct a supply function model, including the cost of production and government rules and regulations.

The new cars industry has a highly fixed cost and strict government rules and regulations because the new cars industry is a significant industry for many countries’ economy development. And due to the consideration of pollution, many governments made their own taxes and market regulations. To simplify the reality, we can write the relationship between the quantity supplied and price and other factors as supply functions as follows: Where Q is the quantity of processed new cars supplied in million units, P is the price of processed new cars in thousand dollars, and As is the price of substitutes in thousand dollars.

This supply function leaves out some other effects and implicitly holds them constant. Figures 2-2 Where Q shows the million units of supply, and P shows the price with the When all traders are able to buy or sell as much as they want, we say that the market is in equilibrium. We can get the equilibrium price and equilibrium quantity. Thus we can use the demand and supply functions to determine the new cars industry market equilibrium. We want to find P at which Sq=Sq =Q ,the equilibrium quantity.

We could use the equilibrium price and equilibrium quantity and the change of them to understand the market better. If surge-3 2. 3 cost function model and profit minimization It is relatively difficult for new players to enter a particular country’s new cars market due to the importance of brand strength and reputation within the new cars market. The cost in car design and manufacture results in high fixed costs. Thus, to understand the new cars industry better, it is necessary to consider the cost functions of the firms. In the short run, a firm incurs costs for both its fixed and variable inputs.

A firm’s fixed cost (F) is its production expense that does not vary with output, such as large machines, land, a plant and other capital goods. As for new cars industry, the fixed cost is very high because it is not easy for a new firm to enter the industry. In the long run, We assume that all in puts can be varied instead of regarding as sunk cost. So the new cars firms’ variable cost (PVC) is the production expense that change with the quantity of output produced. We assume that the new cars firms’ total cost is C=PVC+F in the short run.

Accordingly, we could get the follow cost functions: surge-4 We could see their relationships through the figure 2-4. TO easier to understand the short-run cost, we assume: Where L is the hours of labor services, w is a wage per hour, w is its labor cost. K represents K hours of rent machine, r is rental rate, is its capital cost. As we know all firms want to maximum their profits including the new cars industry. In view of this, we would construct a profit maximizing model to assess the firms’ decisions. However, in the long-run, we make the fixed cost variable. 3 . The models appalling 3.

Appalling the models on an emissions tax on CO pollution The new cars industry has a close connection with the emissions tax on CO pollution for CO is the main harmful gas exhausted by the cars. Firstly, we would illustrate the emissions tax on a new car firm and then we would turn to the whole new cars industry. Figurer-1 As the model we constructed before, we assume that the certain new cars firm is a competitive firm. We can find from figure 3-1 to know how the tax shifts the marginal cost and average cost curves. The firm’s before-tax marginal cost curve is MIMIC and its before-tax average cost is IAC .

The added emissions tax to the per-million-unit cost results in the shift of the after-tax marginal cost curve up to MAC , which equals to MIMIC+Et(emissions tax). Besides, the after-tax average cost curve moves to AC, which equals to IAC;Et. That is to say the before-tax and after-tax equilibrium and the amount by which the firm adjusts changes. Where the before-tax marginal cost curve, MIMIC hits the horizontal demand curve, p, at el, the profit- maximizing quantity is SQL The after-tax marginal cost curve, MAC, intersects the demand curve, p, at e where the profit-maximizing quantity is sq.

Therefore, the new cars production firm produces SQL-sq fewer units of output. As a consequence, the profit also changes in response to the emissions tax. The firm’s profit at every output level falls because the market price is constant but the certain new cars company’s average cost curve shifts upward. Due to the increase in MAC, the firm sells fewer units and makes less profit per unit. The after-tax profit is area and the before-tax profit is area , thus, the new cars company’s profit falls by area B due to the emissions tax. Figure 3-2 After analyzing a certain new cars company, we would consider the whole ewe cars industry.

As we illustrate above, the emissions tax causes the marginal cost curve, the average cost curve, and the minimum average cost of the firm to shift up by Et. As a result, the short-run supply curve of the firm shifts from pretax supply curve, SSL, to a new supply curve, SSL+Et. We know that the market supply curve is the sum of all the individual firm supply curves, so it also shifts up by Et , from Sot S+Et in panel b of the figure. From the supply-and-demand model we construct in 2. 2, we could easily find that the short-run market equilibrium changes.

Before the emissions tax added, he short-run market equilibrium is el, where the downward-sloping market demand curve D intersects in panel b. In that equilibrium, we could get the equilibrium price Pl and equilibrium quantity IQ . We assume that the new cars industry has n firms, so the equilibrium we got before equals n times of the quantity SQL that a typical new cars production firm produces at Pl After the emissions tax, short-run market equilibrium,E, determined by the intersection of D and the after-tax supply curve, S+Et, occurs at pa and SQ.

Because the after-tax price pa is above the after-tax minimum average arable cost, all firm in new cars industry continue to produce, but they produce less than before. Consequently the equilibrium quantity falls from IQ to SQ , where IQ =ins , SQ=ins. Therefore, according to emission tax added to the new cars production firms, the equilibrium price increases, but less than the amount of the emissions tax. The incidence of the emissions tax is shared between consumers and producers because both the supply and the demand curves are sloped. . 2 Appalling the models on the regulation to reduce CO Another way to reduce CO pollution is based on government regulations and policy. In attempts of “disencumbering” transport, the European Commission set in 2009 different emissions limits on the vehicles sold in Europe. On one hand, the government or some automobile societies encourage firms to establish the limitations of CO per kilometers, which would increase the cost of firms to develop more environmental cars to satisfy the market demand.

On the other hand, the government takes actions to change the market demand, such as restricting the number of highly- polluted firms and cars, encouraging people to take public transportation instead of buys new cars, introducing car scrap page schemes. In this essay, e choose two of them to show the effect that the regulation to reduce CO pollution on new cars industry. 3. 2. 1 Restricting the number of highly-polluted firms and cars A limit on the number of new cars firms causes a shift of supply curve to the left, which raises the equilibrium price and reduces the equilibrium price and reduces the equilibrium quantity.

As a consequence, the consumers don’t want to buy as much as they would at lowers prices. Firms that are in the new cars market when the limits are first imposed benefit from profits. There are two explanations are given for such regulations. Fist, using permits to limit the umber of highly-polluted cars raises the earnings of permit firms. Second, some governments contend that limiting highly-polluted cars allows for better behavior of current firms and protection of consumers.

However, it would seem possible that governments could directly regulate the environment protection behavior instead of restricting the number of highly-polluted firms and cars. Figure 3-3 The restriction on the number of highly-polluted cars causes the supply curve to shift from SSL to SO in the short run and the equilibrium to change from Elton E. Moreover, thanks to the government’s policy to encourage the public remonstration, the demand may be deceased, which means that the demand curve would shift from right to left. According to the figure 3-2, the prior demand curve is IQ and it moves to SQ due to the regulation.

And the equilibrium price changes from El to E. Because of the regulations to reduce CO above, we could have new equilibrium price E and new equilibrium quantity. 3. 2. Restricting the emission amount The pursuit of energy efficiency improvement of internal combustion vehicle results in this regulation. In 1999, the European Commission has signed a voluntary agreement with the European Automobile Manufacturers Association to reduce CO emissions for new cars. This agreement established a target of 140 g CO/km in 2008, with an intermediate target of 165-1 egg CO/km for 2003.

The Japan Automobile Manufacturers Association and the Korean Automobile Manufacturers Association also signed the agreement. TO produce more environmental friendly new cars, the new cars company would spend more money on development and research to meet market requirement, which results in the higher cost of the company. Figurer-4 Similar to the 3. 1 introduced before, the money invested in producing environmental new cars increase the cost of the company, which changes the rims’ marginal cost and average cost curves.

The prior marginal cost curve is MIMIC and it moves to MAC after the input to develop new cars. Correspondingly, the average cost curve shifts to AC. Thus, the new equilibrium quantity and equilibrium price would be adjusted by the new cars firms. The marginal cost curve intersects the horizontal demand curve at the point el, with the quantity of SQL before. But they have a new equilibrium after the increase of the cost. Moreover, the profit would change with the higher cost. Because of the increase in MAC, the firm sells fewer units and with the increase In AC, the firm makes less profit per units.

In conclusion, the new cars industry firms assess the effect of the tax and regulations to make new firm decisions and market outcomes by the supply and demand model and cost curves. As a consequence, the pollution may be reduced through the change of supply and demand curves which result in a higher price of new cars and popularity of public transportation instead of private new cars. 4. Other information required to estimate the magnitude of effects of the tax and regulation The new cars market is very big and complex. Hence, we need more data and other information to estimate the magnitude of effects of the ax and regulation.

First, we need to know more about the specific of the new cars market. The new cars market has a large number of buyers. Manufacturers have invested significantly in brand building. Whilst switching costs are low and buyers are price-sensitive, this brand power means buyer power is weakened. This market also has a large number of vehicles being sold to an equally large number of consumers, none of whom have a particularly large market share. Key inputs include commodities like steel, whose price may be difficult for manufactures to control, and other inputs such as fabricated components and labor.

Besides, the substitutes such as used cars and public transport offer a strong threat from new entrants. All of these factors need to be considered when analyzing the effects of emissions tax and regulation. Second, due to the different economy environment and different regulations in different countries, We need concrete analysis of specific issues. For example, in some big cities in China, government limits the use of private cars through restricting the certain license plate number of cars to reduce pollution. And due to the economy recession, some government may care more about developing economy.

It is not easy to evaluate the magnitude of effects. Last but not at least, we need a standardized method to evaluate the emissions of CO and new cars efficiency in order to know the exact magnitude of effect of the tax and regulation. There are business groups with overall efficiency levels significantly closer to the emission limits than others. This suggests the influence of strategic policy at a group level, including the coordination of research and development investment and transference of knowledge between the different brands, in order to help achieve the environmental targets.

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