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The economics of global climate change does not behave according to free market forces
for several reasons. A, divergent national interests distort global market for goods
or services. B, monopolies or cartels control the supply of some goods or services. C, other
relevant goods or services are free and invite indiscriminate use. D, crucial information
about many goods or services is sparse, uncertain or not publicly available. E, processes span
several generations of human beings. The major points of this segment are indiscriminate
use of earth's atmosphere is a tragedy of the commons. Number two, information about
greenhouse gas emissions is not readily available. Three, long delays between cause and effect
increase the difficulty of developing efficient economic policies about climate change.
The next reason the economics of climate change does not behave according to free market principles
is that relevant goods or services are free and invite indiscriminate use. The eighteenth
century economist, Adam Smith, forwarded the idea that the invisible hand of a free market
promotes the overall good of society, because individuals, who pursue their own self-interests
and maximize the revenues, also maximize the total revenues of their community. Unfortunately
free markets break down and situations of large externalities. An externality occurs
when a buyer and a seller and an economic transaction do not necessarily bear all the
costs or reap all the benefits of the transaction. Pollution and technology innovation are classic
examples of processes with large externalities. A polluter reaps benefits directly from polluting
while imposes pollution costs on others. The polluter therefore lacks incentive to reduce
those costs.
The problem reverses for a firm that adopts new technology. The firm typically creates
benefits for others while incurring most of the cost, and therefore loses incentive to
invest in the technology. Pollution creates negative externality, and so the invisible
hand allows too much of it, Whereas technology and innovation creates positive externalities,
and so the invisible hand produces too little of it. Specific to global climate change,
earth's atmosphere has two properties that interfere with market forces. It is non-rival.
One person in the atmosphere does not keep others from using it. Who owns the sky? Is
non-excludable, People cannot be kept from using the atmosphere. How much should a breath
of air cost? If nobody owns a natural resource, nobody will take care of it. If it is free
for the taking, people will tend to overuse it. This is the tragedy of the commons.
Garrett J. Hardin, an ecologist concerned with human overpopulation, described the typical
scenario for the tragedy of the commons. Imagine a pastoral setting in which shepherds are
grazing their flocks on a common green. This commons can sustain a certain number of sheep
in perpetuity. If one shepherd sneaks in another sheep above what is sustainable, he/she benefits
significantly, while the damage of the extra sheep is distributed among all the shepherds
And may be imperceptible, at least initially. Once the other shepherds discover that one
of their own is profiting at their expense, they will add sheep to remain competitive.
With all the additional sheep the commons suffers severe overgrazing, and everybody
dies.
