Question

Explain why we have climate change from an economic point of view and propose an economic policy to combat climate change and explain why zero emissions might not be optimal. The following concepts should be used (not just define the concepts but used them in the context of climate change) in a proper way: market failure, externality, public good, social and private marginal costs, Pareto Improvement.

Answer 1

Climate change is the change of temperature and weather conditions of a place over a long period of time. It is the global phenomenon of climate transformation viewed by the changes in the usual climate of the planet . It is found that human activity is the main reason behind the change in climate causing affects such as global warming mainly due to greenhouse gases, electricity generation, deforestation and transportation.

It might be not optimal that having zero emission can combat with climate change as it's not feasible to reach zero carbon, using only renewable energy, on an economy wide scale. It's theoretically possible but the challenges to get there are many.we can't imagine our life without elctricity or without the usage of motor vehicles as Zero emission refers to an engine, motor, energy source or any other process that emits no waste products that pollute the environment or cause change in the climate .

Climate change in economic point of view :

Market failure: The main or most important factor of the climate change problem is market failure. Market failure due to climate change results in the price of goods not reflecting their true cost to society. When we use electricity, at our homes, drive cars, or fly in a plane, these activities produce greenhouse gas (GHG) emissions that warm the atmosphere The main reason behind the market failure is the so-called ‘greenhouse-gas externality’. Greenhouse gas emissions are a side-effect of economically valuable activities. The impacts of emissions do not fall on those who are conducting the activities , instead they fall on future generations .adverse effects of greenhouse gases are therefore ‘external’ to the market, which means there is usually only an ethical , rather than an economic . As a result, the market fails by over-producing greenhouse gases. Many economists have shown thier concern about this market failure . they argue for policy intervention to increase the price of activities that emit greenhouse gases, there by providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low-carbon technologies

Externality: The emission of greenhouse gases damages the climate and the person responsible for the emissions does not have to pay anything .It is a consequence of an industrial or commercial activity which affects other people without being reflected in market prices, such as the pollination of surrounding crops by bees kept for honey. The standard theory of externalities,under certainty, perfect competition and some government policy points to one of taxation of the emitter equivalent to marginal social cost ,the allocation of property rights with trading and direct regulation.But due to some law jurisidictions and weak representation of those who are affected by this problem is not solved and thus the economics of climate change has been focussed on modelling the implications of growth for emissions, examining and modelling the economics of technological options.

Public good:- Climate change is the exemplary global public good, because each country’s emissions of greenhouse gases contribute cumulatively to the increase of the overall concentration, and each country’s abatements entail higher cost than benefit, unless effective concerted collective actions take place. Unfortunately there are weak political and economic instruments for entering a climate agreement and for attaining and maintaining its goals. Moreover there are strong free-riding incentives since it is quite difficult- and indeed very unpopular- for Governments to convince people to give up part of their current wealth for the sake of uncertain gains in the future, maybe accruing to population in remote distance.

social and private marginal costs: The estimation of social costs is the social cost of carbon. In trying to monetize the social costs arising from carbon, one needs to understand "the effect of a ton of a greenhouse gas on global temperatures, the effect of temperature change on agricultural yields, human health, flood risk, and other harms to the ecosystem". Marginal social cost (MSC) is the change in society's total cost brought about by the production of an additional unit of a good or service. It includes both marginal private cost and marginal external cost. whereas Marginal private cost (MPC) is the change in the producer's total cost brought about by the production of an additional unit of a good or service. It is also known as marginal cost of production.

Pareto improvement : Climate change is due to market failure, the correction of market failures, gives rise to the possibility of Pareto improvements. It is an improvement to a system when a change in allocation of goods harms no one and benefits at least one person. The impacts of green house gases emissions do not fall on those who are conducting the activities , instead they fall on future generations . Pareto improvement is not considered an ideal method to measure improvements because it does not ensure equitable distribution of resources .

Economic policies to combat climate change are:-

1. By reducing the use of personal vehicles to travel and increase the use of public transport and also encourage other people to do the same . Also by increasing awareness among general public to increase the use of electrical vehicle instead of petrol or diesel .
2. Try to prevent the wastage of food as much as possible and do carbon farming which is the climate-smart agricultural practices that reduce greenhouse-gas emissions by storing, carbon in the soil instead of promoting its release into the atmosphere as carbon dioxide .
3. government should impose high carbon tax to reduce the use of chemicals and make our atmosphere clean and green .
4. By planting more trees and stop people from causing deforestation by making them aware about the adverese effect caused by it.