The Economics of Externalities

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The Economics of Externalities Climate Change

• Eric Jamelske
• Department of Economics
• University of Wisconsin-Eau Claire
• jamelsem_at_uwec.edu

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Overview

• Externalities
• Energy Externalities
• Greenhouse Gasses (GHG) Climate Change
• Equitable/Efficient Reduction of Emissions

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Externalities

• An externality arises when an activity influences
  the well-being of others with no compensation for
  that effect.
• When the impact is adverse, the externality is
  negative.
• Over do
• When the impact is beneficial, the externality is
  positive.
• Under do
• Externalities cause markets to be inefficient,
  and thus fail to maximize well-being.

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Externalities

• Negative Externalities
• Automobile exhaust
• Factory pollution
• Cigarette smoking
• Barking dogs (loud pets)
• Airplanes (landing/take-off)
• Chicken Litter
• GHG (carbon)

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Tragedy of the Commons

• Over-grazing on common land
• Over-fishing in common waters
• Congestion on common roadways
• Pollution of common air and common waters

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Energy Externalities

• Coal (SO2, Acid Rain, GHG, Carbon)
• Oil Gas (Automobiles and Refineries)
• Nuclear (Radioactive Waste)
• Solar, Wind, Water, Biofuels

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GHG, Carbon vs. Other Pollution

• Water and Air Pollution
• You can see it, You can smell it
• Cant breathe, Cant drink
• Cost/Benefit?
• GHG, Carbon and Global Climate Change
• You cant see it, You cant smell it
• Raises global temperature
• Cost/Benefit?

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Is this fair? Is this efficient?
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Is this fair? Is this efficient?
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Is this fair? Is this efficient?
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Cap Trade (Tax)

• The cost of reducing pollution to target level of
  emissions is lowest when cleanup is done by those
  with the lowest cost of reducing emissions
• Preferred by all firms
• Efficient/Fair
• Not Perfect
• There are no SOLUTIONSjust TRADEOFFS!