Wednesday, May 9, 2012

Nice Graph showing the External Costs associated with Energy Production. A nice lesson on Negative Externalities...

When a firm produces a good the cost of producing it only includes the input costs associated with making the good.  These are called "internal costs" in economics.  The costs of producing are borne only by the producer and paid for by the consumer, the two most interested parties in any transaction.

What if the production and consumption of this good imposes ADDITIONAL costs on people or society ("third parties") that are not paid for either in the production or consumption of this good? These additional costs are called "external costs" in economics. 

Some goods create more external costs than others. Looking at the bar graph below, you can see electricity production is all over the map. 

On the far left, we have electricity produced by coal.  The black portion of the bar shows how much of the costs of producing electricity are internalized.  The other two bars show how much in external costs imposed on society per kilowatt of electricity produced.  Producing coal for electricity is cheap but it imposes significant other costs, mainly health and environmental, on society that the producers and consumers of coal generated electricity do not pay for up front. 


Source: The Conversable Economist
The other sources of energy  you see on the graph impose less external costs on society BUT cost more to produce and consume.

Energy policy and health/environmental policy converge. The stuff  Economists dream about...

Read the whole blog entry regarding this graph HERE. It is well worth the time.
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