The article talks of the measures taken by the West Bengal government to provide uninterrupted

power supply. Supply refers to the different possible quantities of a product that firms are willing

and able to produce at different possible prices, during a particular time period, ceteris paribus. A

market equilibrium is set where the supply of product meets with the demand of the product.

There are certain factors which affect the supply of a product apart from its price, such as the

expectations of the producers, taxes, subsidies, changes in the price of factors of production,

technological changes and supply shocks. These factors lead to a shift in the supply curve,

moving the market towards a new equilibrium.

Figure 1: Market for power in West Bengal

Price of
D1
power
in S1
rupees
S2

a
P1
b
P2

0 Q1 Q2 Q3 Quantity of
power in units
In the diagram above, when the market was at initial equilibrium point, a, the price of power was

set at P1 rupees and the quantity at Q1 units. Later when the supply curve shifts from S1 to S2,

the price decreases to P2 and the quantity increases to Q2 and the final equilibrium is set at point

b. Also, for the same price P1, consumers used to earlier get only Q1 units of quantity but with

the new supply curve the consumers can get Q3 units of quantity, which is beneficial for the

consumers.

This shift in the supply curve leads to market failure, which occurs when the market is inefficient

in allocating its resources. The overprovision of power leads to externalities, the side-effects of

the action of producers or consumers on other people not involved in those actions. In this case,

negative production externalities occur. They are the exterior costs generated by firms for

example, pollution. These also cause a welfare loss to the society due to the over allocation of

resources like coal used in the production of power.

 Figure 2: Market impacts of negative production externality due to the power production

Price
MSC
of
power
in
S = MPC
rupees

Popt
Welfare loss

Po

D = MPB = MSB

0 Qopt Qo Quantity of power

The diagram above represents the welfare loss resulting due to negative production externality.

Popt and Qopt represent the optimum equilibrium whereas Po and Qo represent the actual market

equilibrium. The supply curve, S represents the marginal private costs of production, the costs of

producing an additional unit of power to the producers. The MSC curve represents the cost of

producing an additional unit to the society. Usually, allocative efficiency is achieved at MSC =

MPC, but in this case since there is high demand for power, there is overproduction creating a

welfare loss.
These externalities can be corrected by government regulations, advertising and policies based

on market. Advertisements can be created to persuade the consumers to use the electricity

wisely. Although this method is simple, this may not be as effective as other measures. Also, if

the advertisements are funded by the Government out of their tax funds then the Government is

paying an opportunity cost as this money could be used elsewhere for the economy of the

country.

Government regulations refer to the legislative measures taken by the government. The

government can ask all the power-producing units to install technologies reducing the emission

of pollutants. Also, the Government can limit the amount of pollution caused by each firm. These

measures can be implemented easily and also help overcome the technical problems of imposing

market-based policies. But, these regulations do not create any type of incentives and hence,

maybe ineffective in reducing the externalities. Lastly, there will be costs of policing and there

may be problems with implementation.

The government can impose tax on output or tax on emission. Tax on output refers to imposing

tax on the amount of power produced by each unit whereas tax on emission refers to imposing

tax on the amount of pollutants emitted by the firms. Although, the tax on emission is more

effective than tax on output as it helps reduce pollution by providing incentives for the firms to

switch to environmental-friendly technology which has a greater hand in the external costs

whereas tax on output only provide incentives to reduce the output quantity, it has practicality

issues such as it is hard to determine which pollutants are harmful and to measure the total

number of pollutants emitted. These policies help to internalize the externality as the producers

pay tax for the external costs created but, the external costs caused are very hard to measure

hence, it is very important to have accurate data to impose market-based policies.

Hence, every measure has pros and cons. So, whatever measure the government adopts, it has to

cope-up with the disadvantages and implement it effectively. In this way, it will be successful in

correcting the externality.