Extracting oil from the African grounds has always been a subject of controversy. Just recently, Tullow Oil, a Britain based oil firm has made a “secret” deal with the government. But what are the externalizes? Locals in the area are exposed to more green house gases, causing the temperature in an already hot region to rise. Furthermore, the environment is being affected by the constant extraction. The firm however, protests that the deal is standard and would ensure environmental protection. Sealing this deal may also public upheaval as rebels often fight for a fairer share in the wealth of oil for its own people, such as in Nigeria. These upheavals may lead to deaths, commotion and noise pollution, of which all are negative externalties.
The oil extraction destroys the environment and releases carbon dioxide. There is a social cost for this because (MSC>MPC). There is a loss for society as the oil is over extracted, thus even members of society who do not use the oil, experience the cost for this. Market failure would occur at point Q, where the oil is being over extracted. Q* is the optimum for oil extraction. As price goes up, according to the Law of Demand, the quantity demanded will go down, the extraction and consumption of oil will be limited.