Chapter 10: Externalities Scientist's generally agree that [a] average annual global temperatures are rising, [b] fossil-fuel...

Chapter 10: Externalities

Scientist's generally agree that [a] average annual global temperatures are rising, [b] fossil-fuel usage associated with human activity has contributed to rising temperatures, and [c] warming holds significant, negative consequences for many people.

How can the "problem" of global warming be explained using the analysis of Externalities? What solutions, if any, are offered by the analysis of Externalities?

Expert Solution

Global warming due to emissions of fossil fuels is a classic example of what economists call an externality. An externality occurs whenever the actions of one party make another party worse or better off, yet the first party neither bears the costs nor receives the benefits of doing so.

In cases where externalities affect many agents (e.g. global warming), assigning property rights is difficult ? Coasian solutions are likely to be more effective for small, localized externalities than for larger, more global externalities involving large number of people and firms.

The Coasian approach ignores the fundamental problem that it is hard to negotiate when there are large numbers of individuals on one or both sides of the negotiation. This problem is amplified for an externality such as global warming, where the potentially divergent interests of billions of parties on one side must be somehow aggregated for a negotiation.

The significance of the assignment problem as a barrier to internalizing the externality depends on the nature of the externality. If my loud stereo playing disturbs your studying, then assignment of blame and damages is clear. In the case of global warming, however, how can we assign blame clearly when carbon emissions from any source in the world contribute to this problem? And how can we assign damages clearly when some individuals would like the world to be hotter, while others would not? Because of assignment problems, Coasian solutions are likely to be more effective for small, localized externalities than for larger, more global externalities.

Rahul Sunny answered 2 years ago

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