Market Externalities

“Market externalities” are those costs associated with a product or service that are not included as part of the transaction. For example, there are extensive military expenses to protect imports of petroleum, health-care costs from air pollution, and ecosystem impacts from water contamination. These costs are associated with energy and water use, but are not included directly on our utility bills. Rather, we pay for them indirectly through our tax bills; health care premiums; or in the economic loss related to lost life, poor health, and degraded biodiversity. That is, since those costs are not paid through our utility bills, they are external to the market transaction, hence the term “market externalities.”

The national security costs of petroleum may range between $0.20 and $1.00 per gallon ($0.05 to $0.25 per liter) of gasoline.¹F. Beach and M.E. Webber, “How Oil and Water Helped Win World War II,” Earth Magazine, March 2011. The National Academies of Sciences and Engineering produced a report titled The Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use, which focused on environmental externalities in the power sector.²Committee on Health, Environmental, and Other External Costs and Benefits of Energy Production and Consumption, et al., Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use (Washington: The National Academies Press, 2010). ² Their analysis concludes that costs between $0.005 and $0.12 per kilowatt-hour (kWh) of damage are incurred from emissions of sulfur oxides, nitrogen oxides, and particulate matter emissions. The mean damage by coal plants from these environmental impacts is 3.2¢ per kWh, which is nearly the same as the wholesale price of electricity from coal-fired power plants. That means the full cost of each kWh from a coal-fired power plant is a few pennies for the electricity itself (to pay for the coal, the employees, etc.), plus a few pennies for the damages. Further, those estimates for monetized damages do not include the impacts from greenhouse gas emissions, water use, or land disturbance. Evidence from a follow-up study examining land disturbance from mining to support coal-fired power plants concluded that the life-cycle impacts of coal ranged from $0.09 to $0.27 per kWh.³P. Epstein, et al., “Full cost accounting for the life cycle of coal,” Ecological Economics Reviews: Annals of the New York Academy of the Sciences 1219 (2011), 73-98, accessed September 7, 2016, doi: 10.1111/j.1749-6632.2010.05890.x. Including those market externalities into the energy and water markets would help them function more accurately and resourcefully by sending clearer price signals.

Image Credits: Signature Message/Shutterstock.com; Ron Reeves/U.S. Navy.