ER / Concepts
Externalities
Created
Definition
An economic activity affects the welfare of third parties, and that effect is not reflected in market prices. → private incentives ≠ social costs/benefits. Efficient when social MC = social MB.
| Meaning | Energy example | |
|---|---|---|
| Negative | imposes uncompensated costs on others → overproduction | CO2 / air pollution from coal plants |
| Positive | creates benefits the decision-maker can’t capture → underproduction | renewable investment → cleaner air, lower health costs; knowledge spillovers |
Links: Market Failure, Perfect Competition, W1.2 Organization of the Electricity Sector