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Global Warming and Economic Externalities

In: The Economics of the Global Environment

Author

Listed:
  • Armon Rezai

    (Vienna University of Economics and Business)

  • Duncan K. Foley

    (New School for Social Research)

  • Lance Taylor

    (New School for Social Research)

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.

Suggested Citation

  • Armon Rezai & Duncan K. Foley & Lance Taylor, 2016. "Global Warming and Economic Externalities," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 447-470, Springer.
    • Handle: RePEc:spr:steccp:978-3-319-31943-8_20
    DOI: 10.1007/978-3-319-31943-8_20
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    Keywords

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    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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