Microeconomics and Global Warming: Efficient and Effective Policies to Solving Climate Change
Efficient and effective policies to solving climate change
Global warming is an issue that has recently been pushed to the forefront of political leaders debates and policy making. With temperatures at the end of the century that ‘might be up by anything from 1.1C to 6.4C’(Economist 2009) and the fact that ‘current average global temperatures are only 5C warmer than the last ice age’ (Economist 2009) there is some serious concern about the welfare of humans over the next century. However the predicament of global warming originates from economic theory. The fact that there has been such a detrimental effect on the planet from the extensive use of carbon dioxide emitting fossil fuels and ozone depleting chemicals shows that the private market is not capable of producing an economically efficient outcome. Externalities evolve when activities affect a third party who is not involved in this activity(Swann & McEachern 2006) and in this case it’s blatantly obvious that the rising world temperatures and its associated problems is an extremely large externality. This market failure comes about from the lack of private property rights, which are the exclusive right of an owner to use, rent or sell property(Swann & McEachern 2006). In this case there is no single entity that has ownership of the air or atmosphere and due to this no one can demand restitution for damaging it. Just as it was economic theory that explains the problem of climate change it also provides the solution. The government must take action in the private market and through implementing policies, internalise these externalities. This means putting a dollar value on the externality and having this reflected in its price. With the three main policies being subsidies, a carbon price through taxation and a carbon price through a cap-and-trade system, they all do this but reach their target with vastly different levels of efficiency and effectiveness.
Subsidies
A subsidy is an economic
Global warming is an issue that has recently been pushed to the forefront of political leaders debates and policy making. With temperatures at the end of the century that ‘might be up by anything from 1.1C to 6.4C’(Economist 2009) and the fact that ‘current average global temperatures are only 5C warmer than the last ice age’ (Economist 2009) there is some serious concern about the welfare of humans over the next century. However the predicament of global warming originates from economic theory. The fact that there has been such a detrimental effect on the planet from the extensive use of carbon dioxide emitting fossil fuels and ozone depleting chemicals shows that the private market is not capable of producing an economically efficient outcome. Externalities evolve when activities affect a third party who is not involved in this activity(Swann & McEachern 2006) and in this case it’s blatantly obvious that the rising world temperatures and its associated problems is an extremely large externality. This market failure comes about from the lack of private property rights, which are the exclusive right of an owner to use, rent or sell property(Swann & McEachern 2006). In this case there is no single entity that has ownership of the air or atmosphere and due to this no one can demand restitution for damaging it. Just as it was economic theory that explains the problem of climate change it also provides the solution. The government must take action in the private market and through implementing policies, internalise these externalities. This means putting a dollar value on the externality and having this reflected in its price. With the three main policies being subsidies, a carbon price through taxation and a carbon price through a cap-and-trade system, they all do this but reach their target with vastly different levels of efficiency and effectiveness.
Subsidies
A subsidy is an economic