The concept of externality: Implications for TVA Environmental Research Center

Pollution of the environment is a result of the economic activities of production and consumption. And although the market system is touted as the superior method of organizing and operating an economic system, society frequently is dissatisfied with some of the side effects. In these cases of market failure, a cry for intervention often is raised to obtain more socially-desirable solutions. Environmental pollution is one symptom of market failure. If the TVA Environmental Research Center is to focus on defining solutions to environmental problems and designing policy options for implementing such solutions, its efforts should benefit from an understanding of why the market fails and how it may be adjusted to produce more socially-desirable results. The purposes of this report are to: (1) promote an appreciation for and understanding of the concept of externality; (2) demonstrate the utility of the concept in the design and packaging of policy and technology for improved environmental performance; (3) provide a brief summary of the externality valuation issue currently being debated by the electric power industry; and (4) identify environmental research and development agenda opportunities or strategic considerations suggested for the Center by this review