Question

Topic: Economic Benefits, External Costs and the Regulation of Unconventional Gas in the United States.

Article Summary : The article discussed was written by Ian Cronshaw and R. Quentin Grafton and published in Energy Policy in 2016. The article examines the external costs and economic benefits created by the recent rapid growth in unconventional gas production (UGC) in the United States. It examines how policy makers should design and implement regulations that reduce the amount of external costs of UGC while remaining cost-effective for the producers. Cronshaw and Grafton propose 10 principles that regulators and producers of UGC should implement that would cost-effectively reduce external cost by UGC. Cronshaw and Grafton argues that firms that utilize UGC in the United States are now able to access previously unattainable sources of natural gas in which the economic benefits amount to $433 billion in 2012 and has directly and indirectly employs 2.7 million (Cronshaw and Grafton 2016, 181). Cronshaw and Grafton discuss how UGC has created multiple external costs to those residing in nearby communities. Water and air pollution, land access, traffic congestion, and loss of property values are some of the external cost associated with UGC (Cronshaw and Grafton 2016, 182). The article concludes with discussing how regulators need to implement cost-effective measures that reduce the external costs of UGC in order to maintain the net benefits of UGC in the United States.

Assessment : Cronshaw and Quentin’s argument for advising industry regulators to consider the cost-effectiveness of imposing policy designed to reduce the external costs of UGC is sensible. Cronshaw and Quentin phrase their concerns over keeping UGC advantageous to those production firms using that method by providing the framework that gas production within Europe was slowing and that they were developing gas importing infrastructures in order to satisfy their demand for gas. This article does a good job in highlighting the topics of social efficacy and external costs and benefits. Throughout the article, Cronshaw and Quentin continually discuss what the external costs are of UGC and how they impact the surrounding communities. This furthers the discussion provided by Field and Field (2015) in displaying another situation in which the private costs of UGC does not consider the external costs of UGC. Furthermore, Cronshaw and Grafton expand on Field and Field (2015) discussion of how market failure can occur when the social value is remarkable different than the market value. As such, Cronshaw and Grafton (2016) explain public intervention using regulations is necessary for the social value of UGC to increase towards the market value of UGC.

Implication: The article by Cronshaw and Grafton has limited amount of implications within other areas of environmental and resource economics. Cronshaw and Grafton look at the external benefits and costs of UGC through the lens of policy implementation and industry regulation. As such, it only provided a case study on how external costs and benefits are incurred within an industry and how regulation would also be need for the furtherance of that industry. Other researchers can use Cronshaw and Grafton’s article as a research model to do the same type of assessment and advisement for other enterprises within natural resource industry.

Question: How do the authors address opportunity costs and social efficiency as part of their analysis?

Answer 1

This article studies the external costs and economic benefits to explain the opportunity costs and social efficiency as a part of their analysis of growth of Unconventional Gas Production (UGC). The rapid growth of this production process is due to these two factors which have helped the author to suggest policy design formulations. The UGC creates external costs on those residing in the are of their location in the form of water and air pollution,traffic congestion etc which the author advise to reduce by using regulations.These external costs create social inefficiency by making the people worse off (reduction in social welfare).

Adding to that UGC have been providing economic benefits also like providing employment and tapping other sources of energy therefore the authors talk about improving regulatory intervention to raise the social value of UGC towards the increase of market value of UGC.

The opportunity costs inferred here is that by formulating cost effective external cost reducing policies we over-go the cost of totally doing away with UGC. So, the authors recommend to have cost effective policy so that there is not a market failure for  such an important natural resource industry.