Fracking: Economics and Externalities

From Huffington Post

The BBC headline this afternoon communicates the outcome of a vote in Parliament to allow fracking in National Parks. This would appear to be a doubly controversial outcome. Fracking is a means to extract gas from deep underground, and is controversial, as is any kind of economic development in National Parks.

Fracking is unpopular amongst many because of concerns regarding the amounts of water used in the process, which must be transported to fracking sites at great cost, and also concerns about fracking causing small earthquakes, or tremors. Nonetheless, it is a means for producing energy, hence increasing its supply, and bringing prices down. It’s generally acknowledged to have played a considerable role in energy prices falling in the US.

The government’s own website for National Parks says they are “areas of protected countryside that everyone can visit, and where people live, work and shape the landscape”. Anybody who has visited any of them knows how beautiful they are, and rightly protected. Nonetheless, at the same time they provide a valuable place where economic activity could take place; not least there is likely plenty of natural resources beneath them, but also, wouldn’t it be nice to be able to study at university and in the afternoon take a walk, or go for a jog in one of our glorious National Parks? Many companies would jump at the opportunity to provide such a working environment for their employees (of course, many wouldn’t also). However, these are areas that are protected for a reason – primarily their outstanding natural beauty. The tragedy of the commons teaches us that more than likely without this protection, we’d overuse such areas.

Now, of course, the fracking bill passed in Parliament restricts digging to areas of non-outstanding natural beauty, but once 1.2km underground, then frackers (so to speak) can drill horizontally to get underneath the areas of outstanding natural beauty. This, naturally, is concerning – will it have no effect whatsoever to be doing things underneath the ground?

What this fundamentally boils down to is the difference between private net benefits of actions, and social net benefits. When making decisions, we will usually consider the benefits and costs that accrue to us individually and pay less attention to benefits and costs that society at large may feel as a result of our actions. When there’s a difference between the two, like for example if I choose to play music very loudly in my neighbourhood, we say there’s an externality. In the case of economic activity in National Parks, there are clearly private benefits: mining companies, and energy providers will get private benefits, as we all will, if energy prices fall. But equally, if damage is done to our National Parks as a result, we will all suffer since we can no longer enjoy those National Parks as we previously did.