Experiment 3 The Cars Market
Learning objectives
This exercise will take your students to explore concepts presented in units 8 and 12. Some of them:
Key concepts
- Market failures
- Private marginal cost
- External marginal cost
- Social marginal cost
- Consumer surplus
- Producer surplus
- Social surplus
Introduction
Is it always safe to trust markets to take society to the best possible scenario? Some situations may require adjustments.
If production or consumption of a good affect agents by a mechanism different from prices, market equilibriums are not necessarily Pareto efficient (Unit 12.1). This experiment reproduces a cars market. Consumers get a marginal benefit of buying a car: by driving to work, carrying objects, taking friends, etc. The result of this is an individual willingness to pay for a car. On the other hand, production of cars presents marginal costs. However, extensive cars trading generate massive externalities. Evidence shows that the use of fossil fuels has increased the level of CO2 in the atmosphere (Unit 1.5). Additionally, a massive traffic deteriorates the pavement. This generates additional costs in the use of cars. Particularly, time of travel increases with damaged roads.
This activity emulates a cars market where students take trading decisions. Half of the participants are assigned the role of cars producer firms. The rest of the students take the role of cars consumers. From a certain moment, a consumption externality is applied for massive use of cars. Theory describes how the social surplus is reduced by this externality. Equilibrium price is reduced; and, traded quantity decreases as well.
