Chapter 28: Problem 11

Why is air pollution caused by coal-fired power plants an externality?

Short Answer

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Question: Explain why air pollution caused by coal-fired power plants is considered an externality. Answer: Air pollution caused by coal-fired power plants is considered an externality because the negative effects and associated costs of the pollution, such as human health issues and environmental damages, are not borne by the power plant or accounted for in the price of electricity generated by the plant. Instead, these costs are imposed on society, who did not contribute to the production of electricity. This leads to market failures and an inefficient allocation of resources, as the true costs of coal-fired power generation are not captured in the market price.

Step by step solution

Define Externality

An externality is an economic term referring to a cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities can be positive (benefits) or negative (costs) and are associated with market failures, where the market does not effectively allocate resources due to the presence of these external effects.

Discuss Coal-Fired Power Plants and Air Pollution

Coal-fired power plants generate electricity through the combustion of coal, a fossil fuel. This combustion process produces significant amounts of air pollution, included but not limited to particulate matter, sulfur dioxide (SO2), nitrogen oxides (NOx), and carbon dioxide (CO2). These pollutants have both local and global environmental impacts, as well as harmful effects on human health.

Explain Negative Effects of Air Pollution

The pollutants emitted by coal-fired power plants have several negative effects on society. Some of these effects include respiratory and cardiovascular health problems, smog and reduced air quality, damage to agricultural crops, acid rain, and climate change. These adverse effects can result in increased healthcare costs, decreased productivity, and damage to ecosystems.

Connect Air Pollution to Externality

Air pollution from coal-fired power plants is considered an externality because the costs associated with the pollution, such as healthcare expenses and environmental damages, are not borne by the power plant or accounted for in the price of electricity generated by the plant. Instead, these costs are imposed on society as a whole, or specific members of that society, who did not contribute to the production of electricity. This disconnect between the private cost of production and the overall societal costs can lead to market failures and an inefficient allocation of resources, as the true costs of coal-fired power generation are not captured in the market price.

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Why is air pollution caused by coal-fired power plants an externality?

Short Answer

Step by step solution

Define Externality

Discuss Coal-Fired Power Plants and Air Pollution

Explain Negative Effects of Air Pollution

Connect Air Pollution to Externality

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