Tag Archives: private cost

01.03.2013 | Disaster Economics: Neighbors and Utility Companies

Still dealing with the impact of Hurricane Sandy, I keep pondering the cost of preparing for the next storm. Personally, it has been worth purchasing a generator. But, what to do about my neighbor?

Located a half mile from my home, he has many beautiful old huge trees that were destabilized by the storm. Just a week ago, one tumbled down onto a power line during a rainstorm and eliminated our power for 6 hours until repair crews hauled the debris away. However, when asked to engage in further disaster prevention and cut down whatever remaining limbs threaten power lines, he refused.

Similarly, for my power company, it is much cheaper to clean up after a storm than to prepare for it. In NYC, Consolidated Edison (Con Ed) expects to spend $450 million cleaning up storm damage. And, when the Sandy relief bill passes Congress, I expect they will get some of the money. By contrast, storm prevention, including underground wires and elevated substations, would cost Con Ed 100 times as much.

So, if we focus on their private cost, it makes sense for my neighbor and Con Ed to do minimal disaster damage prevention. For them, prevention is much more expensive than clean-up.

But what if we move beyond and look at the “social” cost?

The entire cost benefit equation changes when we add the cost to society. Then, we include fatalities and storm related illness, lost work days, longer commuting times, school cancellations, lower retail sales, lower stock prices of retailers and even the diminished value of pension funds that hold those retail stocks. You see where I am going. The impact of Sandy has a far reaching ripple. Her cost has been huge.

The private cost of prevention is much greater than the private cost of clean up. However, the results might be reversed if we look at the private cost+social cost. Then, does prevention make sense? And if so, what should I do about my neighbor?

Sources and Resources: For more reading about the intricacies of disaster prevention, I suggest the NY Times article, “Hurricane Sandy Alters Utilities’ Calculus on Upgrades” and James Surowiecki’s New Yorker column, “Disaster Economics.”

Posted by: adminEcon
Tags: Consolidated Edison, cost benefit analysis, Delta Plan, elevated substations, flooding, Hurricane Sandy, incentive, JCP&L, private cost, PSE&G, social cost, underground power lines
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05.23.2011 | The Real Cost of a Car

To see how much a car costs, just add up the purchase price, insurance, gas and a yearly service. Yes? According to one group of researchers, a car that is driven 100,000 miles costs $19,000 more than you might think.

The $19,000 relates to external costs. Pollution from autos creates health spending. Congestion generates delays, alternative plans, noise. Accidents means fatalities, days lost at work, medical expenses, property damage. In addition, more gas takes us to oil dependency and carbon emissions. Not included in the $19,000 total but also a cost is bridge and road maintenance and construction.

What does that extra $19,000 mean? It says that the cost of driving is both private and social.

Citing the private and social cost of driving as one of many examples, a new paper from the Hamilton Project, “Strategy For America’s Energy Future: Illuminating Energy’s Full Costs.” suggests we need to rethink public policy in 4 areas: 1) Changing the incentives that shape consumer and business energy use; 2) Enabling innovators to capture more of the profit of new technology; 3) Using more accurate cost benefit analysis for regulatory policy; 4) Pursuing global solutions to environmental and climate concerns.

The Economic Lesson

Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. They see negative externalities when the impact on a third party is harmful. Vaccines usually have positive externalities while pollution is the typical example of a negative externality.

Taking externalities an economic step further, we can look at cost. On a demand and supply graph, the equilibrium price of a decision that has a positive externality is too high because of the benefits experienced by society. Correspondingly, the equilibrium price of a decision with negative externalities is too cheap because of the associated costs that result.

An Economic Question: Which business or individual decisions have a social benefit that (theoretically) offsets the private cost? Which business or individual decisions have a social cost that (theoretically) adds to the private cost?

Posted by: adminEcon
Tags: autos, energy, gas, negative externality, private cost, social cost
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