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Economics: What Are Externalities? Essay

2059 words - 9 pages

Essay 3 Alexandra Logan, LGNALE002

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, ...view middle of the document...

Furthermore, until recently, Eskom didn’t pay tax to the government (Spalding-Fecher & Matibe, 2003). Tax exemptions can distort the market in a similar way to negative externalities (Owen, 2006). As a result, Eskom’s electricity tariffs are one of the lowest in the world (Spalding-Fecher & Matibe, 2003).

There are a number of externalities throughout the life cycle of coal-fired power generation. Mining, transportation and quality of coal, the age of combustion technologies and the presence of emission-reducing technology all have associated externalities (Owen, 2006). The mining and transportation of coal has four major negative externalities: acid mine drainage, biodiversity loss, health impacts and loss of life as well as greenhouse gas (GHG) emissions (Edkins, Winkler, Marquard, & Spalding-Fecher, 2010). However, the chief source of pollution is the power generation stage (Owen, 2006). Coal-fired power production results in high GHG emissions intensity (Spalding-Fecher & Matibe, 2003) (Edkins, Winkler, Marquard, & Spalding-Fecher, 2010). In 1999, Eskom contributed 40% to the total national GHG emissions (Spalding-Fecher & Matibe, 2003). GHG are the drivers for global climate change and the external costs associated with climate change such as flooding, changes in agriculture patterns and increasing temperature need to be considered. However, there is uncertainty about the magnitude of these costs, since the impact of climate change is cannot be determined with absolute accuracy.

A major externality caused by electricity generation is a result of air pollution such as particulates, sulphur dioxide (SO2) and nitrogen oxide (NOx) (Owen, 2006) (Edkins, Winkler, Marquard, & Spalding-Fecher, 2010). Damage from acid rain, a direct result of air pollution, can affect human health, corrode materials, reduce crop yields and damage forests, fisheries and ecosystems (Spalding-Fecher & Matibe, 2003) (Owen, 2006) (Friedrich & Voss, 1993). SO2 and NOx emissions, like GHG, have long-range effects, which make calculations of the damage imprecise (Owen, 2006).

Coal-fired power stations also require huge quantities of water in addition to degrading the quality of water in the recipient water resource or nearby water resources. Eskom also pays very low prices for water and it’s contentious whether this reflects the exact opportunity cost of water (Spalding-Fecher & Matibe, 2003). Power station and mining accidents, visual and noise pollution are also associated externalities (Owen, 2006).

A positive externality of coal-fire electrification in South Africa is that electrification provides cleaner and safer forms of energy for low-income households (Spalding-Fecher & Matibe, 2003). Burning coal, wood and paraffin indoors causes high levels of indoor air pollution and the use of paraffin has been linked to poisoning of children and accidental fires (Spalding-Fecher & Matibe, 2003).

Nuclear power generation

The only non-coal station of...

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