Fracking — An Externality Market Failure
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Politics and Activism

Fracking — An Externality Market Failure

The rise of an externality leads to a non-optimal market, and thus, the federal government must intervene in order to fix the market failure.

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Fracking — An Externality Market Failure
The Vermilion

Fracking And Pollution

Fracking is the process of extracting natural gas from below the Earth by drilling into the ground and pushing a stream of high-pressure water into shale in order to release trapped gas. Fracking can lead to many economic and social benefits including an increase of domestic oil production, less dependence on foreign oil sources such as nations in the Middle East, and greater local economic development around the fracking sites. However, one of the major criticisms behind fracking is the major potential of polluting the surrounding environment near the operation sites.

One of the methods of pollution is through the contamination of local water sources.

The process of fracking creates a large amount of waste water that contains contaminants. The waste water is stored in wells or dumping pits in order to prevent the contaminants from spreading into the main water supply. However, reports such as one in Pavilion, Wyoming provide the contrary as residents in the town have experienced strange tastes and smells to their drinking water. It was shown that the waste water and chemicals put into the pits eventually leaked into the groundwater stores in Pavilion. Thus, fracking poses a harm to the local drinking sources including groundwater.

Another method of pollution from fracking is through the leaking of chemicals into the air.

Chemicals such as benzene and formaldehyde can leak into the air during the operations and affect surrounding neighborhoods and communities near the fracking (Rice). Health problems that can arise from the pollution include birth defects and respiratory problems. Thus, providing a major problem that needs to be solved in order to protect the future health of American citizens.

The federal government must intervene into the issue as the health of the citizens in the nation will be affected.

If the citizens are unhealthy, this could lead to disastrous results on our economic performance in multiple ways. One of the ways is through causing a greater expenditure on healthcare which can lead some individuals to file for bankruptcy. Another way is that workers affected by the pollution from fracking can ask for sick leave which lowers the production for some industries. In turn, this leads to an underproduction of goods in the respective market. Overall, the federal government must find solutions in order to discover the proper approach to solve the environmental problems surrounding fracking or else the economic health of the nation will be at risk.

How Fracking Represents A Market Failure

There are four types of major market failures: externalities, public goods, monopoly and information asymmetry. The operation of fracking represents the market failure of an externality. An externality is where a consumer or producer creates a cost or benefit on a third party that was not involved in the initial transaction. There are two types of externalities — positive and negative. A positive externality provides a benefit to the third-party due to the market transaction while the negative externality provides the opposite with harm to the third Memorandum party due to the market transaction. The rise of an externality leads to a non-optimal market, and thus, the federal government must intervene in order to fix the market failure.

In this case, the transaction occurs between the oil company that does the process of fracking and the land owner.

The oil company will ask the land owner for rights of the land in order to complete the operations. The land owner in return receives a benefit such as money, shares, etc. when he or she allows the company to use the land. The oil company is then able to produce gas from underground which is sold as a good on the market. However, there is a market failure with the rise of multiple forms of pollution including water and air.

The third-party that is affected by the air and water pollution is the neighborhoods and communities surrounding the fracking operations. The marginal social cost in terms of the health of the populations affected by the pollution is greater than the marginal private cost incurred by the oil company owners and the land owner. The diminishing health of the population in turn leads to a lower productivity of the workers and causes an underproduction for other markets. This leads the federal government to intervene in order to correct the market failure.

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This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
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