Global Warming and Economic Externalities

February 1, 2009

This paper explains equilibrium concepts appropriate to modeling an un-corrected negative externality, such as climate change.

Given the scientific evidence that human emissions of greenhouse gases (GHG) contribute to global warming which will have real economic consequences through climate change, and the fact that until recently there is neither a market price for GHG emissions nor alternate institutions to impose limits on emissions, the authors regard GHG emissions as an uncorrected negative externality. They 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 un-corrected negative externality.

Authors: Armon Rezai, Duncan K. Foley and Lance Taylor
Download PDF