With record-breaking high temperatures affecting much of Western Europe, North America and China there is rising demand for goods that can keep people cool whether it is fans, window blinds or swimming pools. When the weather gets hot there is often a surge in demand for such products and producers struggle to keep up.

The market for air-conditioning units is no exception to this and it is a market that is experiencing significant long-term growth due to rising global temperatures because of climate change. The demand for air-conditioning units is also driven by rising incomes in countries with hot climates. The growing middle classes in countries such as India and China are increasingly in a position to buy air-conditioning units as their incomes rise. air-conditioning units could certainly be seen as a luxury good with a price for an average unit costs around $3,000.

The problem with air-conditioning is that it contributes to the problem it is trying to solve. air-conditioning units increase CO2 emissions through their energy use and they also leak hydrofluorocarbons which are thousands of times more potent than CO2 in their impact on climate change. According to the International Energy Agency there are around 1.6 billion air-conditioning units and by 2050 this will grow to 5.6 billion units. The scale of increase in the use of air-conditioning units by 2050 will require a huge increase in the world’s electricity capacity.

The air-conditioning market is a good example of market failure and a market that is unsustainable. The negative externalities of AC units can be looked at as production externalities associated with the electricity used to power them. If the extra electricity needed for additional AC units comes from fossil fuels this will add to global warming.  Air-conditioning units that emit hydrofluorocarbons which also contribute to CO2 emissions will lead to negative externalities through the use of the units so they would be consumption external costs.

The air-conditioning market also raises an interesting circular question about sustainability. The world gets hotter, people buy more air-conditioning units, more carbon is emitted and the world gets warmer. The benefits of air-conditioning today have a negative effect on the population in the future.

We can look at two possible solutions to the air-conditioning market failure. Firstly, increased electricity generation from renewable sources or from sources that do not emit carbon such as nuclear power. Secondly more energy efficient air-conditioning units. From a policy-making perspective do governments globally have the will and resources to push the AC market in a more sustainable direction?   

Possible questions for discussion with a class

1. To what extent is air-conditioning a market failure?

2. Should governments intervene to regulate the air-conditioning market?

3. What are the problems of trying to reduce market failure in the market for air-conditioning?