ECS2606B – Environmental Economics B | Assignment 1
UNIVERSITY OF SOUTH AFRICA
College of Economic and Management Sciences
ECS2606B
Environmental Economics B
ASSIGNMENT 1
Semester 1 | 2026
Student Name: [Your Full Name]
Student Number: [Your Student Number]
Module Code: ECS2606B
Due Date: [Assignment Due Date]
Total Marks: 100 marks
Question 1: Market Failure and Externalities
[20 marks] Study the following scenario and answer the questions that follow.
SCENARIO: A coal-fired power plant in the Mpumalanga province generates
electricity for industrial and domestic consumers. In its production process, it
emits sulphur dioxide (SO₂) and particulate matter into the atmosphere. These
Department of Economics | UNISA Page 1
, ECS2606B – Environmental Economics B | Assignment 1
emissions contribute to respiratory illnesses among nearby communities, acid
rain affecting surrounding farmland, and reduced visibility in the region. The
power plant does not bear any of these costs in its private production
calculations.
1.1 Define the concept of a negative externality and explain how it leads to market
failure. Use the scenario above to illustrate your answer.
(6 marks)
Answer:
A negative externality arises when the production or consumption of a good imposes
costs on third parties who are not party to the market transaction. These costs are not
reflected in the market price, causing the private cost to be lower than the social cost.
As a result, the market produces more than the socially optimal quantity, constituting
a form of market failure.
In the scenario, the power plant's emissions of SO₂ and particulate matter impose
health costs on neighbouring communities and damage surrounding agricultural
land. These costs are external to the plant's private cost calculations. Since the plant
only considers its private costs (fuel, labour, capital), it does not account for the
damage it causes, leading to overproduction of electricity relative to the socially
efficient level. This represents a negative production externality.
Diagrammatically, the Marginal Private Cost (MPC) lies below the Marginal Social
Cost (MSC), since MSC = MPC + Marginal External Cost (MEC). The market
equilibrium occurs where demand equals MPC (Qₙ), which exceeds the social
optimum where demand equals MSC (Q*). The welfare loss (deadweight loss) is
represented by the triangle between Q* and Qₙ.
1.2 Distinguish between private costs and social costs. In your answer, calculate
the external cost per unit if the private cost of producing one unit of electricity is
R0.85 and the social cost is R1.40.
(6 marks)
Answer:
Private costs refer to the costs borne directly by the producer in the course of
production — these include payments for raw materials, labour, capital, and energy.
Social costs, by contrast, encompass all costs imposed on society as a result of
production, including both private costs and any external costs imposed on third
parties.
Department of Economics | UNISA Page 2
UNIVERSITY OF SOUTH AFRICA
College of Economic and Management Sciences
ECS2606B
Environmental Economics B
ASSIGNMENT 1
Semester 1 | 2026
Student Name: [Your Full Name]
Student Number: [Your Student Number]
Module Code: ECS2606B
Due Date: [Assignment Due Date]
Total Marks: 100 marks
Question 1: Market Failure and Externalities
[20 marks] Study the following scenario and answer the questions that follow.
SCENARIO: A coal-fired power plant in the Mpumalanga province generates
electricity for industrial and domestic consumers. In its production process, it
emits sulphur dioxide (SO₂) and particulate matter into the atmosphere. These
Department of Economics | UNISA Page 1
, ECS2606B – Environmental Economics B | Assignment 1
emissions contribute to respiratory illnesses among nearby communities, acid
rain affecting surrounding farmland, and reduced visibility in the region. The
power plant does not bear any of these costs in its private production
calculations.
1.1 Define the concept of a negative externality and explain how it leads to market
failure. Use the scenario above to illustrate your answer.
(6 marks)
Answer:
A negative externality arises when the production or consumption of a good imposes
costs on third parties who are not party to the market transaction. These costs are not
reflected in the market price, causing the private cost to be lower than the social cost.
As a result, the market produces more than the socially optimal quantity, constituting
a form of market failure.
In the scenario, the power plant's emissions of SO₂ and particulate matter impose
health costs on neighbouring communities and damage surrounding agricultural
land. These costs are external to the plant's private cost calculations. Since the plant
only considers its private costs (fuel, labour, capital), it does not account for the
damage it causes, leading to overproduction of electricity relative to the socially
efficient level. This represents a negative production externality.
Diagrammatically, the Marginal Private Cost (MPC) lies below the Marginal Social
Cost (MSC), since MSC = MPC + Marginal External Cost (MEC). The market
equilibrium occurs where demand equals MPC (Qₙ), which exceeds the social
optimum where demand equals MSC (Q*). The welfare loss (deadweight loss) is
represented by the triangle between Q* and Qₙ.
1.2 Distinguish between private costs and social costs. In your answer, calculate
the external cost per unit if the private cost of producing one unit of electricity is
R0.85 and the social cost is R1.40.
(6 marks)
Answer:
Private costs refer to the costs borne directly by the producer in the course of
production — these include payments for raw materials, labour, capital, and energy.
Social costs, by contrast, encompass all costs imposed on society as a result of
production, including both private costs and any external costs imposed on third
parties.
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