Hong Kong’s Pollution Problems Caused by Vehicles Commentary

By: Stephanie Clarissa

Grade: 11

Title of article: Hong Kong Offers $1.3 Billion to Replace Polluting Vehicles

Source of article: http://www.bloomberg.com/news/2013-01-16/hong-kong-to-offer-1-3-billion-to-replace-polluting-vehicles.html

Date of access: Feb 1st, 2013

Date of article published: Jan 16, 2013

Date commentary was written: Feb 1st, 2013

Word Count: 744

Section of syllabus related: Market Failure

Article Highlights:Natasha Khan & Michelle Yun writes about the pollution problem old diesel vehicles in Hong Kong creates.

“ Hong Kong plans to offer HK$10 billion ($1.3 billion) in subsidies to replace old diesel

vehicles and limit their life-span to battle smog that’s responsible for more than 3,000

premature deaths a year.

The proposal seeks to cut particulates emissions by 80 percent and nitrogen oxides by

30 percent, Chief Executive Leung Chun-ying said today in his first policy speech since

taking over on July 1. Leung also proposed to set a service limit for new diesel

commercial vehicles at 15 years.

Leung faces the challenge of cleaning up Hong Kong’s air, which fails to match up to

that ofNew York and London, as vehicle and marine emissions contribute to smoggy

skies. Air qualityhas worsened since 2007, and a government failure to force aging

buses and trucks off its streets is a key cause of pollution.

“We strive to improve air quality on all fronts,” Leung said. “We must phase out old

diesel commercial vehicles with greater financial incentives while putting in place more

stringent regulatory measures.”

The city is also considering legislation that will force ships berthing at its ports to switch

to low-sulphur diesel, Leung said in the address.

Dirty Fuel

Maersk Line, the world’s biggest container-shipping company, this month threatened to

stop using cleaner fuel at Hong Kong port from next year if the government doesn’t

mandate higher quality oil for carriers berthing in the city. The company and 17 other

operators have voluntarily used low-sulfur oil, which costs more, for the past two years.

Commercial diesel vehicles are the biggest contributors to roadside pollution, Christine

Loh, undersecretary for environment, said in an interview last month. Past subsidies

weren’t big enough to incentivize owners to replace high-polluting vehicles, she said.

Other than privately owned vehicles, franchised buses operated by companies

controlled by billionaire Cheng Yu-tung also run on diesel.

The HK$10 billion in subsidies announced today is almost triple the combined HK$3.7

billion offered by Leung’s predecessor in 2007 and 2010. Leung is targeting owners of

80,000 heavy-polluting pre-Euro and Euro I to III diesel commercial vehicles.”

Commentary: The Hong Kong government plans to cut pollutions caused by old diesel vehicles, by setting a legislation to lay them off the streets. Whereas for ships, the government are setting a legislation to force them to switch to low-sulphur diesel. In addition, the government plans to offer HK $1billion in subsidies in order to replace old diesel vehicles that is a major cause of pollution.

Market failure refers to “the failure of the market to allocate resources efficiently”-(Tragakes). The pollution in Hong Kong is a form of market failure, specifically negative externalities of consumption. This is because pollution is caused by consumers driving the cars. Subsidy refers to “payment by government to suppliers that reduces the costs of production and encourage them to increase output”- (welker). The Hong Kong government has set a HK$10 billion in subsidies, targeting the owner of 80,000 heavy polluting old diesel vehicles with hopes to increase the supply of vehicles operating on low-sulphur diesel. The government subsidizes low-sulphur diesel vehicles as they are a better alternative for the environment.

In figure 1, the MPB curve exceeds the MSB curve, showing that diesel cars are being over-allocated, causing ‘external cost’. The overallocation of old diesel vehicles create excessive amount of pollution, which is a case of market failure. The welfare loss evident in figure 1, is the result of market failure. To fix this market failure, there has been a subsidy on low-sulphur diesel vehicles (fig 2). The subsidy reduces the costs of production of low-sulphur diesel vehicles, which increases their supply (MPC=MSC curve shifts to MPC-subsidy curve). Ideally, the subsidy should make the subsidized good more attractivee and encourages consumers to purchase them, which results in a reduce of use of old diesel vehicles. If successful, the subsidy should change welfare loss represented by market failure to welfare gain which eliminates market failure (seen in fig 2).

For consumers, the subsidy is a good idea. It reduces costs of production for the producers, which decreases the price of low-sulphur diesel cars. In figure 2, it is evident that Psub (price post subsidy) is lower than P1 (price pre subsidy). The consumers can enjoy a lower priced car while for the long run, reduce air pollution. By reducing air pollution, there will be less risks of diseases giving consumers the opportunity to live healthier and reduce costs of treating for diseases caused by air pollution (if any). However, a disadvantage for the consumers is that in the short run they might have to replace their old diesel vehicle with a new low-sulphur diesel vehicle, which means that they have to spend a portion of their income for the good.

For the government, the subsidy might not be so well. The first disadvantage is finding the right amount of subsidy. The article have said that “past subsidies weren’t big enough to incentivize owners to replace high-polluting vehicles”. Now that the government sets a subsidy triple the amount offered by chief executive Leung, in the short term it will be hard to tell if the subsidy amount is efficient or not. We will have to wait for the long run, in order to tell. The second disadvantage is that subsidies set by the government inevitably have an opportunity cost. The money set to subsidize the low-sulphur diesel vehicles might be useful for other goods/service such as public goods.

For Hong Kong, the subsidy is a very good idea. In the short term, it may not seem like the subsidy is efficient because it takes a long time for change to be evident in the environment. Therefore in the long run, with more consumers purchasing subsidized low-sulphur diesel vehicles and less using old diesel vehicles, there will be less pollution. This is an advantage as less pollution leads to cleaner air, which means less diseases caused. In addition, there will be less than 3,000 premature deaths yearly (that is currently caused by air pollution in Hong Kong). With healthier citizens, there will be more labor to support the firms, which will lead to economic growth for the country. With cleaner air, it will boost tourism, which will also lead to economic growth for the country.

Evaluating the efficiency of subsidy, in the long term it will be very good for Hong Kong not only as a cleaner country but also for its economic growth.

Works Cited(Welker)The Effects of a per Unit Subsidy. Prod. Jason Welker. YouTube. Welkerjason, 7 Nov. 2011. Web. 3 Feb. 2013. <http://www.youtube.com/watch?v=NWje0rUThC8>.

(Tragakes)Tragakes, Ellie. Economics for the IB Diploma. 2nd ed. N.p.: n.p., n.d. Print.