Monday, May 25, 2015

Externalities and energy

Externalities occur when the costs or benefits of a good sold in a market are not entirely paid or received by the market participants.  Negative externalities occur when someone other than the buyer or seller incurs a cost when a good is produced or consumed. Many forms of pollution can be classified as generating negative externalities. For example, when you power your car with gasoline, you pay the price at the pump, but other people "pay" a real cost because your consumption leads to air pollution which harms human and ecosystem health.  How much is that external cost?  A new study from Duke suggests that the external cost is an additional $3.80 per gallon of gasoline and $4.80 per gallon of diesel.  These external costs include healthcare costs, loss of workforce productivity, damage to crops, lost school days and higher insurance costs. This means that the "true" price of gasoline is more than $6.00 per gallon.  Society is heavily subsiding the use of fossil fuels.  Is this really a "free market"?  What is a potential policy change that could remedy this obvious market inefficiency?   

Positive externalities occur when someone other than the buyer or seller realizes a benefit from the production or consumption of a good. The use of renewable energy sources can be seen as providing external benefits to society in the form of pollution reduction and economic growth through job creation.  We know that when a market generates positive externalities, the efficient quantity will not be provided.   What is a potential policy change that could remedy this market inefficiency?  

4 comments:

Jawad Dughmush said...

1. tax
2. Subsidy

Mary Densmore said...

Going along with what Jawad said, taxing gasoline could be an efficient way to correct the market inefficiency. However, if gas was taxed so that the price of one gallon of gasoline was over 6 dollars, who would actually buy gasoline? I know I wouldn't. But then again, most of the places I need to go to on a daily basis are within biking distance from my house.

Ryan Lynch said...

Going off of Mary's comment, I agree with the notion that gasoline would not be at a sellable price at over $6 per gallon and would probably not lead to any kind of benefit to society. Maybe some sort of mandatory investment in research in alternatives to gasoline such as an engine that runs on sunlight, water, etc. would be a solution? That's the only thing that I can some up with.

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