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Global warming and economic externalities

Author

Listed:
  • Armon Rezai
  • Duncan Foley
  • Lance Taylor

Abstract

Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto-improvement from mitigation investment, and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.
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Suggested Citation

  • Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(2), pages 329-351, February.
  • Handle: RePEc:spr:joecth:v:49:y:2012:i:2:p:329-351
    DOI: 10.1007/s00199-010-0592-4
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    1. Franck Lecocq & Jean-Charles Hourcade, 2012. "Unspoken ethical issues in the climate affair: Insights from a theoretical analysis of negotiation mandates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(2), pages 445-471, February.
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    4. Jean-Marc Burniaux & Joaquim Oliveira Martins, 2016. "Carbon Leakages: A General Equilibrium View," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 341-363, Springer.
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    More about this item

    Keywords

    Global warming; Growth with negative externalities; Optimal economic growth; D62; O41; Q54;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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