There are TWO (2) questions in this section. Read the following case study entitled "THE MOTOR VEHICLE REPAIR AND SERVICING INDUSTRY" and answer the questions. The typical British small garage is stereotyped as untidy, messy, cluttered with hoists and equipment, with a few overall-clad figures working to the clatter of tools and blaring radio. This picture is quite different from that of the early years of the automobile. In those days, work on the car was the domain of the chauffeur or blacksmith, or the manufacturer if repairs were beyond both. This was to change following the Second World War. As the volume of cars grew so the motor repair sector began to expand, giving employment to the many mechanically trained ex- servicemen. The market grew so quickly that there was little chance of erecting entry barriers. For example, although there were moves to introduce specific (City and Guilds) qualifications for mechanics and thereby impose a degree of restricted entry on the industry, this was never fully established. The result is to be seen today. The motor vehicle repair industry has developed into a good example of a monopolistically competitive industry. modifying, or 1I TUN AB In 2001, it was estimated that the MVR industry in the UK employed just over 170,000 people in about 44,000 businesses. The statistics also show that the industry is still dominated by small and medium-sized businesses (SMEs) with over half the workforce (~58%) employed in either zero employee enterprises e.g. sole traders or partnerships, or businesses employing less than 10 people. Companies with less than 50 people accounted for approx. 83% of the workforce. The vehicle repair and servicing industry is diverse, being made up of general repairers, specialist repairers (i.e. bodywork, electrics), dealers and petrol stations. With so many garages, the industry has remained a highly competitive one. However, specialism and locality enable the various garages to maintain a fairly constant degree of control over their price. 1. What are the specific features of the motor vehicle repair industry that have restricted the growth of large-scale operations? (25 Marks) 2. Why the monopolistic competitive market structure is inefficient and socially undesirable? (25 Marks)There are THREE (3) questions in this section. Read the following case study entitled "FUEL TAXES AND OPTIMALITY" and answer the questions. How much petrol should be taxed? The tax on petrol varies widely around the developed world. America's gasoline tax is currently about 40 cents an American gallon, equivalent to 7 pence a litre. Many Americans are calling for it to be cut, as the summer increase in prices begins to make itself felt, and reflecting a more general alarm about the country's 'energy crisis'. In Canada the lax is half as big again as in America; in Australia it is more than double. In Japan and most of Europe, the specific tax on petrol is around five times higher than in America, standing at the equivalent of some 35 pence a litre. At the upper extreme is Britain, where fuel duty (paid in addition to value-added tax) has risen in recent years to a punitive rate of just under 50 pence a litre, seven times the American levy. You would expect well-designed petrol taxes to vary from country to country, according to national circumstances - but not, on the face of it, by a factor of seven. In America it is taken for granted that Europe's petrol taxes, let alone Britain's, are insanely high, and presumably something to do with socialism. In Britain, on the other hand, it is taken for granted that America's gas tax is insanely low, part of a broader scheme to wreck the planet. Protests in Britain last year showed that petrol tax had finally been raised all the way up to its political ceiling - but nobody expects or even calls for the tax to be cut to the American level. America and Britain may both be wrong about the gas tax, but it seems unlikely that they can both be right. So how heavily should petrol be taxed? A paper by lan Parry of Resources for the Future, an environmental think-tank in Washington. DC, looks at the arguments. The most plausible justification for taxing petrol more highly than other goods is that using the stuff harms the environment and adds to the costs of traffic congestion. This is indeed how Britain's government defends its policy. But the fact that burning petrol creates these 'negative externalities' does not imply, as many seem to think, that no tax on petrol could ever be too high. Economics is precise about the tax that should, in principle, be set to deal with negative externalities: the tax on a litre of fuel should be equal to the harm caused by using a litre of fuel. If the tax is more than that, its costs (which include the inconvenience inflicted on people who would rather have used their cars) will exceed its benefits (including any reduction in congestion and pollution). The pollution costs of using petrol are of two main kinds: damage to health from breathing in emissions such as carbon monoxide and assorted particulates, and broader damage to the environment through the contribution that burning petrol makes to global warming. Reviewing the literature, Mr Parry notes that most recent studies estimate the health costs of burning petrol at around 10 pence a litre or less. The harm caused by petrol's contribution to global warming is, for the time being, much more speculative. Recent high-damage scenarios, however, put an upper limit on the cost at about $100 per ton of carbon, equivalent to 5 pence a 3litre of patrol. Adding these together, you come to an optimal petrol tax of no more than 15 pence a litre. High potrol toxoo aloo holp to roduoo traffic congestion. However, they are badly designed for that purpose. Curbing the number of car journeys is only one way to reduce congestion. Others include persuading people either to drive outside peak hours or to use routes that carry less traffic. High petrol taxes fail to exploit those additional channels. As a result, Mr Parry finds, the net benefits of a road-specific peak-period fee (the gain of less congestion minus the cost of disrupted travel) would be about three times bigger than a petrol-tax increase calculated to curb congestion by the same amount. Still, if politics or technology rules out congestion-based road pricing, a cocond-best case can be made for raising the petrol tax instead. According to Mr Parry, congestion costs in Britain might then justify an additional 10 pence a litre in tax. This brings you to a total petrol tax of around 25 pence a litre. The pre-tax price of petrol is currently about 20 pence a litre, so this upper-bound estimate of the optimal tax represents a tax rate of well over 100% - a 'high tax', to be sure. Yet Britain's current rate is roughly double this. On the same basis, of course, America's rate is far too low (even a lower bound for the optimal rate would be a lot higher than 7 pence a litre). Britain's rate, judged according to the environmental and congestion arguments, looks way too high - but plainly the British government has another reason for taxing petrol so heavily. It needs the money to finance its plans for publis spending. Politically, raising money through the tay on petrol, protests notwithstanding, has proved far easier than it would have been to collect the cash through increases in income tax or in the broadly based value added tax - or, for that matter, through congestion based road-pricing (always dismissed as 'politically impossible'). This seems odd. Supposing that actual and projected public spending justified higher taxation, Mr Parry's analysis strongly suggests that the country would have been better off paying for it through income taxes than through a punitive petrol tax. And the petrol tax is not only wasteful in economic terms, If Mr Parry is right; it is also regressive in its distributional affects, increasing the most of living for poor car-owning households much more than for their richer counterparts. At last, Britain has found the political ceiling for the petrol tax. What is remarkable is just how high it proved to be. 1. What are the economic reasons for fuel taxes being different in different countries? (15 Marks) 2. Is the fuel taxes an inefficient way of reducing traffic congestion? Explain. (20 Marks)3. Why market fails to reflect social costs and social benefits in the fuel market? Explain. (15 Marks)