Economics of Energy Overview

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One of the most fundamental questions of our time is the rate at which we should consume our fossil resources and how this decision impacts our economic well-being at present and for decades into the future. Technologically, we currently have the necessary tools to exploit both the exhaustible fossil and nuclear fuels and the renewable hydro, wind, solar, and biomass resources. Other technologies such as fusion and yet unknown resources may also become available within the next few decades. In previous chapters, we covered technological issues related to the use of these resources and their effects on our environment. In this chapter we will discuss the economical issues of energy and their impact on our technological society. The economics of the environment will be covered in the next chapter.

The economic dilemma every human faces is how to satisfy unlimited wants with limited resources. The resource limitations could be technological know-how, sufficient purchasing-power, time, or materials and energy. This is why we choose (or are forced) to give up or postpone some desires to get others which are seemingly more important to us. Because of limited income, we must prioritize our desires, for example by buying a used instead of new car or by postponing the purchase of a home until we have graduated from college. At other times we give up what we already have for the sake of our children and grandchildren.

The same is true with other resources at our disposal. For example, we only have limited fossil resources, and they cannot last to meet all our energy needs for a very long time. Because we are endowed with all the resources, we have the choices of using energy more efficiently, practicing conservation, and seeking alternative sources of energy; alternatively, we may continue consuming energy with no restraints and leave future generations to resolve their own energy shortages. Because energy plays a crucial role in the economic health of all nations, understanding concepts and fundamental laws in economics is essential and is the subject of this chapter.


(1) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Colander, D. C., Economics, 3rd E., Irwin-McGraw-Hill, 1998.

Bosselman, F., Energy, Economics and the Environment, Second Edition, Foundation Press, 2005.

Energy Economics, Science Direct Elsevier Publishing Company. Publishes research papers concerned with the economic and econometric modeling and analysis of energy systems and issues.

External Links

United States Association for Energy Economics (

International Monetary Fund (

The World Bank (