Abstract

Coal is a private goods produced competitively. Its short-term price elasticity is low while long-term price elasticity is high because of substitution of other energies for coal.

Market may fail in the respect of sustainable development since there is a difference between current market discount rate and social discount rate, for equilibrium prices in markets may lead to undervaluation of and over-exploitation of coal. This indicates that proper regulation may be used to correct the failure of coal market. 

The definition of external costs is that there is a external cost when one person doesn’t bear the cost caused by his action, which means that there is another person bears it. Understanding it further, the whole society, including the person imposing external costs on others would be hurt at last, since any person being hurt by external costs may make action to avoid them or retaliate makers of external costs. In other words, external cost as an institutional phenomenon makes social potential benefit out of all members of the society.

The concept of external cost may have several meanings. The first is concreted as “derict external loss”; the second is “prevent cost” which is emerged for investing in the measurements to avoid derict external loss; the third is “social welfare loss” which is derictly and rederictly produced by derict external loss.

The internalization of coal’s external costs is a kind of institutional change. Under new institutions, people’s behavior would shift from making directly external loss to invest resources in preventing such loss. As two kinds of external costs, preventing costs are lower than direct external loss. Then internalization of external costs would bring about growth of social wealth.

There are two sorts of external costs in China for having not finished its market-oriented reform. The “first-sort external costs” mainly indicates such a sort of external costs which are still made under normal property rights, market institutions and legal system; while the “second-sort external costs” means such a sort of external costs which are brought about by shortcomings of current institutions.

The prices of coal are determined in perfect competition markets at almost whole procedure of production and distribution, if only considering coal itself without considering the impacts of downstream markets and substituted product markets, and of the non-market factors to determine pricing and allocating of coal’s production factors.

However, in China, there is “the cost of price distorted” , “cost of property rights defect” and “cost of leal-system defect” which are called the second-sort external costs.

Coal’s direct external loss is about 1790 billion Yuan if the prices and output level of coal is as that in 2007, which is as 7.3% of GDP that year.

The coal’s prices would increase 23.1% if internalizing all external costs of coal.

The cost of internalizing coal’s external costs is about 822 billion Yuan, then the net additional social wealth is about 969 billion Yuan.