Geoscience Reference
In-Depth Information
externalities because they are external to (i.e., not refl ected in) the
market transactions. An externality is a by-product of economic activ-
ity that causes damages to innocent bystanders. (These are also called
public goods in the economics literature, but the term externality is
more intuitive and will be used here.)
Life is full of externalities. Some are harmful, such as when some-
one dumps arsenic into a river and kills the fi sh. Others are benefi cial,
such as when a researcher discovers a polio vaccine. But global warm-
ing is the Goliath of all externalities because it involves so many activi-
ties; it affects the entire planet; it does so for decades and even centuries;
and, most of all, because none of us acting individually can do any-
thing to slow the changes.
Global warming is a particularly thorny externality because it is
global. Many critical issues facing humanity today—global warming and
ozone depletion, fi nancial crises and cyber warfare, oil price shocks and
nuclear proliferation—are similarly global in effect and resist the control
of both markets and national governments. Such global externalities,
whose impacts are indivisibly spread around the entire world, are not
entirely new phenomena, but they are becoming more important be-
cause of rapid technological change and the process of globalization.
So global warming is a special problem for two central reasons: It is
a global externality caused by people around the world in their everyday
activities of using fossil fuels and other climate-affecting measures; and
it casts a long shadow into the future, affecting the globe and its people
and natural systems for decades and even centuries into the future.
Economics teaches one major lesson about externalities: Markets
do not automatically solve the problems they generate. In the case of
harmful externalities like CO
2
, unregulated markets produce too much
because markets do not put a price on the external damages from CO
2
emissions. The market price of jet fuel does not include the cost of the
CO
2
emissions, and so we fl y too much.
Economists talk about an “invisible hand” of markets that set prices
to balance costs and desires. However, the unregulated invisible hand
sets the prices incorrectly when there are important externalities. There-
