Economic Analysis Of Externalities, Cost Structures, And Market Outcomes In Steel And Water Supply Industries

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1Economic Analysis of Externalities, Cost Structures, and MarketOutcomes in Steel and Water Supply Industries1. The production of gasoline causes air pollution but the damage from thispollution is not priced and is not factored into the price of gasoline. Markets areinterconnected, and the price of gasoline affects the cost of transportation; the costof transportation affects how easy it is to get people and goods, including food, fromone place to another and thus affects the value of land for housing and the cost offood; the cost of transportation also affects the market for cars and publictransportation; and all of these affect people’s budgets. Given this interconnectionof markets, what are the consequences of an unpriced (and unregulated) externalityin the market for gasoline? If there are competitive markets in all these othermarkets, are they likely to produce an efficient allocation of these other goods?Explain the reasons for your answer.Answer:-###The consequences of an unpriced and unregulated externality concerning the marketprice of gasoline has been existing long and in markets related to energy generation andconsumption, many more distortions tend to come into picture that has the potentiality tocreate opportunities for bettering the situation but that are not considered to beexternalities as these distortions falls outside the purview of the study and the committeethat keeps in touch with them only briefly. It would be a valid attempt if we can try toidentify and quantify at the same time those externalities and that would help inrecognizing the consequences concerning the externality in the market of gasoline.One form of marketdistortions thathas the capability of affecting energy markets is thepresence of market power.In the extreme cases there exista single supplier of energy(monopoly) or s single buyer (monopsony). In such cases a firm having the market powercan affect the price and also the quantity that is being traded to fulfill its own advantagesAnd imply costs on others that exceed its gains. Cartels, such as OPEC, or largepurchasers of oil, such as the United States, can exhibit market power.Another form of market distortion that can greatly impact the energy markets is theenforcement of taxes or subsidies that do not help at all in correcting externalities butrather are imposed to augment revenue and thereby aiding support to an industry or servesome otherpurpose. Theprimary concern of this is the subsidies for oil exploration haveencouraged the swift expansion of the petroleum basedindustry and hence raising thevolume of externalities generated by the production and consumption of petroleum andpetroleum basedresources.Information asymmetries and public goods are two additional cases of market failure thatcould affect energy markets. So, from thisstudy, we quantify to the extent possible thenointernalizedexternalities conditional on the existing set of market regulations, taxes,subsidies, and market distortions from all sources.

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