Essay: Externalities

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  • Subject area(s): Economics essays
  • Reading time: 2 minutes
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  • Published on: January 19, 2020
  • File format: Text
  • Number of pages: 2
  • Externalities
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Externalities can be simply defined as unintended consequence to an action, weather that be positive or negative. In the energy market, externalities are almost always negative as the process to obtain energy for commercial use can exploit workers, generate toxic waste, and be unevenly distributed. Unfortunately, energy producers most often do not take the social cost of externalities into account when they are calculating their rates which can leave problems unresolved. I believe this process should change. I believe that taxes should be imposed to account for the externalities but only after so much energy is consumed on the customer’s end. To clarify, I see energy as a commodity but also as a right that everyone should have access to.
This particular strategy is not used in the current energy market but a similar policy was tested in Cape Town, South Africa when water was becoming more and more scarce for the city. A “day zero” had been issued which indicated direct consequences to the overuse of water. The citizens were told they that water usage was limited or you will face penalties, even a tariff on water usage was introduced. (Reference 1) Collectively, the city has been cutting water consumption drastically and pushed their day zero back to 2019 for now. If my proposal was introduced in the energy market, homes and business would be allotted a certain amount of energy at a certain rate, X $/kwh and after that cap is reached, they are required to pay additional fees per kwh past their cap, which would be used to work toward the public good. This strategy, in theory, may encourage people to use less energy which in turn would put less strain on the energy production market and save on greenhouse gases.
Ethically this strategy is questionable because a flat tax above the designated load would disproportionally affect those people with lower income. Determining how much energy allotment each household or business received would be the primary factor with this. This cap could be established using a combination of relative household income (be that on a geographic average or using actual data), and the number of occupants in a household (understanding that dependents would be counted differently than independent adults). However, issues that are faced by those with lower income are exacerbated by factors in their homes such as poor insulation that can lead to drafts, and thus higher heating bills. Additionally, you then would have to find a way to determine how much energy is allowed during each season for different regions of the country. Businesses could work on a sliding scale, the local mom-and-pop shop would not pay the same overages as an Amazon warehouse, for example.
The list of externalities to energy production is extensive, and while there isn’t a direct path to abate all of them, one key tool to doing so is ensuring the funds are available. Using the additional funds generated by this plan, we can begin to invest in projects that benefit the consumer on a fundamental level (Reference 2). Better, more reliable distribution, availability of grants for higher efficiency furnaces, replacing windows in homes, and even employ energy auditors to visit homes and industry to identify places for improvement (Reference 3). The funds could also in part be delegated to environmental justice groups who advocate for those living next to the coal plant, or the oil field, or those affected by contaminated drinking water due to hydraulic fracturing. Too often the excuse is made that the funds just aren’t available, when in reality, they are.

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