Three Gorges Dam and Externalities

Currently covering market failure with my A2 class and we briefly discussed the building of the three Gorges Dam. The private cost of the dam $25 billion but according to its critics, an environmental disaster on a monumental scale. The Chinese say it’s all about flood control and clean hydro electric power. The environmentalists say it’s about power and national pride and the arrogance of man trying to tame forces of nature. Below is a very good documentary on the negative externalities of the Three Gorges Dam in China. However in its construction there are both costs and benefits including private and external. This is a topic in Unit 1 of the CIE A2 Economics syllabus and is found under – Externalities. Remember that we have both positive and negative externalities of production and consumption. Figure 1 shows a negative externality of production which applies to the building of the dam.

THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS

Externalities create a divergence between the private and social costs of production.

SOCIAL COST = PRIVATE COST + EXTERNAL COST (externality)

• Private costs are the costs to a ‘firm of producing a good or service and to an individual of consuming a product.

• External costs are the spill over effects on third parties.

• Social costs are obtained by adding the private and external costs together. They reflect the total cost to society of an economic decision.

The same concept applies for Private and Social Benefits:

SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT (externality)

Benefits and Costs of building the Three Gorges Dam

For more on Market Failure view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.