Data centres have become the backbone of the modern digital economy, driven by the exponential growth of artificial intelligence, cloud computing, and streaming services. Global electricity demand from data centres is projected to double over the next five years. To keep servers cool, these facilities consume millions of litres of water daily, often in regions already experiencing water stress. Furthermore, communities situated near data centres complain of continuous low-frequency noise pollution from giant cooling fans, which has been linked to sleep deprivation and falling property values.
The environmental debate is intensifying. While technology giants claim to purchase renewable energy certificates to offset their footprint, critics argue that their continuous baseload demand forces coal- and gas-fired power stations to run longer, increasing overall carbon emissions. In some municipalities, data centres consume up to 20% of the local water supply, threatening agricultural irrigation and municipal reserves.
Despite these external impacts, governments and local authorities actively compete to attract data centre developments using tax breaks and fast-track planning approvals. Supporters argue that data centres are essential public-good-like infrastructure that underpins all modern economic activity, driving productivity, high-tech employment clusters, and enabling the digital solutions needed to combat climate change. Some energy experts also suggest that data centres can offer "demand-side response" services to the electrical grid, temporarily scaling down usage during peak times to prevent blackouts, thereby acting as a stabilizing force for renewable-heavy grids.
Using the concept of external costs, evaluate whether the development of hyperscale data centres is under-provided or over-provided in the market. Use an appropriate diagram in your answer.
54 exam-style questions on Edexcel A A Level Economics 1.3.2 Externalities. Each one has a worked solution and a mark scheme showing where the marks go.