Economics: What are Externalities? Essay

Economics: What are Externalities? Essay

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Externalities occur when economic decisions create costs or benefits for parties other than the decision maker (Visser, 2014). Both negative and positive externalities exist. A positive externalities arises when an action by a party results in benefits to others thus the social benefit is greater than private benefit. A negative externality occurs when an action by a party yields harmful effects on the other. In terms of negative externalities the social cost is greater than private cost. Market failure occurs when the private costs are not equal to the social costs.

The electricity sector in developing countries is increasing rapidly, however, there are a number of externalities linked with energy generation and the price of energy does not reflect all the associated costs. These externalities include effects on human health, the environment, climate, subsidies, agriculture as well as reactor accidents and economic effects (Bernal-Agustin & Dufo-Lopez, 2006) (Friedrich & Voss, 1993) (Edkins, Winkler, Marquard, & Spalding-Fecher, 2010). In the uncontrolled market, there is a inclination to produce more energy and produce a larger waste fuel supply than is socially optimal (Aronsson, Backlund, & Lofgren, 1998) therefore economic instruments are necessary to internalize the cost of externalities for optimal pollution.

In this paper the externalities of three types of power-generation will be discussed: coal-fired, nuclear and photovoltaic (PV). The economic instruments to internalize the externalities will also be examined.

Coal-fired energy generation

In South Africa, Eskom provides 95% of the electricity, of which coal-fired electricity accounts for 86% (Pegels, 2010). Eskom’s coal-fired power stations have high...


... middle of paper ...


...tainable and non-carbon energy sources. However, FIT is not pro-poor because even with subsidies the price of electricity will increase and subsidies distort market prices (Visser, 2014).

Other ways to internalize external costs include; integrated resource planning, using resources within the Southern African Development Community, which include hydropower and natural gas (Spalding-Fecher & Matibe, 2003)l as well as using the Clean Development Mechanism (Spalding-Fecher & Matibe, 2003).

South Africa has a long way to go before externalities associated with energy generation are internalized into the cost or eliminated completely. The entire electricity supply sector needs to be restructured towards the renewable energy sector. However, economic instruments need to be implemented before the sector can move away from coal-intensive electricity production.

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