Problem
Scenario:
A coal mine in South Africa has undertaken to export coal to the Netherlands. Coal mining imposes many external costs on its surroundings and the people who live in it. Coal mining is by nature disturbing and destructive of the environment. Open cast mining removes large volumes of soil and rock overburden to get to the workable coal seams, and destroys regional aquifers. Mining produces large mountains of solid waste. Coal heaps are prone to spontaneous combustion, and thus air pollution. Leakage from waste heaps are acidic, adding to the general and large-scale acid mine drainage impact and interferes with underground and surface water (water pollution). Mining also has serious social consequences: on the movement of people, on people's health and the environments they live in.
To placate the local community, the coal mine built a mining school in the same location to train the locals on advance mining techniques. To date this school has help trained 2 generations of miners for this mine and others in the region.
Task
Under these conditions, mark failure arises. Market failure occurs when there is inefficient allocation of resources in a free market resulting in welfare loss.
1. Define the term 'externality' and specify if this is a negative or positive externality
2. Using the example of the coal mine, explain the presence of externality. Show how allocative inefficiency will result in over production or welfare loss.
3. Describe the key actors who benefit and who suffer from this externality