In Nigeria's oil-producing communities, gas flaring by petroleum exploration firms generates severe environmental degradation and health hazards that are not factored into the firms' operational costs. In economic terms, how does this uncompensated impact affect market efficiency in the petroleum sector?
- It creates a negative externality, causing private marginal cost to be lower than social marginal cost and leading to overproduction.Answer
- BIt represents an opportunity cost where the money spent on extraction technology equals the alternative foregone.
- CIt reflects a policy of commercialization where state equity in petroleum assets is fully transferred to private operators.
- DIt indicates real GDP growth that automatically guarantees an improvement in economic development and living standards for host communities.
Answer
The uncompensated environmental degradation creates a negative externality, making private marginal cost lower than social marginal cost and resulting in market overproduction.
When crude oil extraction generates uncompensated environmental pollution like gas flaring, the private marginal cost incurred by the firm is less than the overall social marginal cost borne by society. This divergence leads to market failure and overproduction relative to the social optimum.
Step-by-Step Solution
Key Concept
Negative Externalities and Social vs Private Cost in the Petroleum Sector
Estimated Time:1m 15s