Question

Kindly Google "Gies--The Real Cost of Energy" and read the article.

Briefly summarize some of the main externalities associated with electricity generation and use. Are the externalities real or pecuniary?

When considering policies aimed at capturing the externalities, is the goal of these policies to eliminate pollution?

Answer 1

All energy production has environmental and societal effects. But calculating them — and pricing energy accordingly — is not an easy task

• Fossil fuels receive indirect subsidies in their waste disposal as well as some direct subsidies.
• Nuclear energy fully accounts for its waste disposal and decommissioning costs in financial evaluations.
• External costs should be considered in evaluating energy sources.

Externalities are effects which arise from electricity generation and which are not factored into any narrow economic consideration of the enterprise.

In particular, external costs are those actually incurred in relation to health and the environment and which are quantifiable, but are not built into the cost of the electricity and therefore are borne by society at large. They include particularly the effects of air pollution on human health, crop yields and buildings, as well as occupational disease and accidents. The impact of global warming is now generally included.

Both energy production and consumption can simultaneously affect regional air quality, local water stress and the global climate. Identifying the air quality–carbon–water interactions due to both energy sources and end-uses is important for capturing potential co-benefits while avoiding unintended consequences when designing sustainable energy transition pathways. Here, we examine the air quality–carbon–water interdependencies of China’s six major natural gas sources and three end-use gas-for-coal substitution strategies in 2020. We find that replacing coal with gas sources other than coal-based synthetic natural gas (SNG) generally offers national air quality–carbon–water co-benefits. However, SNG achieves air quality benefits while increasing carbon emissions and water demand, particularly in regions that already suffer from high per capita carbon emissions and severe water scarcity.

Economic production can cause environmental damage. This tradeoff arises for all countries, whether high-income or low-income, and whether their economies are market-oriented or command-oriented.

From 1970 to 2012, the population of the United States increased by one-third and the size of the US economy more than doubled. Despite this growth, the United States, using a variety of anti-pollution policies, has made genuine progress against a number of pollutants.

According to the US Energy Information Administration, the emissions of certain key air pollutants declined substantially from 2007 to 2012; in fact, they dropped 730 million metric tons a year—a 12% reduction. This seems to indicate that progress has been made in the United States in reducing overall carbon dioxide emissions, which cause greenhouse gases.

Despite the gradual reduction in emissions from fossil fuels, many important environmental issues remain. Along with the still-high levels of air and water pollution, other issues include hazardous waste disposal, destruction of wetlands and other wildlife habitats, and the impact of pollution on human health.

Externalities:

Private markets offer an efficient way to put buyers and sellers together and determine what goods are produced, how they are produced, and who gets them. The principle that voluntary exchange benefits both buyers and sellers is a fundamental building block of the economic way of thinking. But what happens when a voluntary exchange affects a third party who is neither the buyer nor the seller?

Consider, for example, a concert producer who wants to build an outdoor arena that will host country music concerts a half-mile from your neighborhood. You will be able to hear these outdoor concerts while sitting on your back porch—or perhaps even in your dining room. In this case, the sellers and buyers of concert tickets may both be quite satisfied with their voluntary exchange, but you have no voice in their market transaction.

The effect of a market exchange on a third party who is outside, or external, to the exchange is called an externality. Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers.

Externalities can be negative or positive. If you hate country music, then having it waft into your house every night would be a negative externality. If you love country music, then what amounts to a series of free concerts would be a positive externality.

• An externality, sometimes called a spillover, occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange. Externalities can be positive or negative.

• Market failure is when the market does not allocate resources on its own efficiently in a way that balances social costs and benefits; externalities are one example of a market failure.

For pecuniary externalities, on the other hand, the best policy prescription is to do nothing out of the ordinary. Pecuniary externalities are a sign of the market working as intended: competition is driving down prices and forcing firms to look for better ways to satisfy buyers.

Economists tend to ignore pecuniary externalities in their welfare analysis since, in the model, pecuniary externalities show up as a transfer of welfare from existing firms to incoming firms and consumers. Net welfare at worst doesn’t change and at best increases.