The market is not always as predictable as economists want it to be, especially in the context of mainstream economics. Policy makers often get trapped when they develop a policy using a set of market-based tools only. In attempt to reduce carbon emissions and mitigate climate change sometimes they take a decision to restrict or even prohibit use of fuel-based vehicles, like in China. If we look at the relationship between elasticity of demand and market outcome, the demand for cars is relatively elastic. Owning a car is not a basic need so demand is believed to be sensitive to price change. The laws of free market tell us that fuel price hikes decrease the quantity demanded, when tax is imposed, less people are willing to pay higher price and switch to alternatives. Public transport subsidy may be another variance of green fiscal policy, discouraging people from driving cars and slowing down an auto market. However it may not always lead to desirable outcome.
According to World Economic Forum report, Estonians didn’t reduce car usage when public transport became free. Most of the people still pay as they go, but I wonder if the outcomes in Estonia have been finalized too early?
And where does our logic fail?
I believe, as much as people adapt to market changes by reducing their expenses, lifestyle inertia and psychological implication could be strong factors when it comes to moving from a “car owner” category to “public transport user”. The policy might have a minimal effect in a country where majority of population can afford driving a car, considering that driving a car implies that a person could afford buying a car initially and will most probably stick to a habit of driving it in a long run. On the contrary, many economic instruments are still effective ways to reduce negative environmental impact, such incentivizing or subsidizing electric cars, as well as policies that reinforce environmental compliance, and increase the market of less polluting, low carbon cars.