Jan 14 2008

“Global warming is one GIANT market failure”

Matt Rothschild of Progressive Magazine concludes that global warming is one “giant market failure”, and argues that US president George W. Bush is making it too hard for regulators in the country that is the world’s largest emitter of greenhouse gases to impose limits on pollution.

Among the externalities caused by the emission of greenhouse gases that Rothschild points out:

  • Rising sea levels
  • Arctic free of ice
  • Draughts  in Africa

Discussion questions:

  1. Is Rothchild’s understanding of global warming as a market failure correct in an economic sense?
  2. Is imposing new “limits on pollution” the best way achieve a long-term reduction in the emission of greenhouse gases?
  3. What alternatives to direct government controls over firms’ emissions does the Bush administration have that may make use of “markets” to correct this “giant market failure”?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

14 responses so far

14 Responses to ““Global warming is one GIANT market failure””

  1. Chan Min Parkon 16 Jan 2008 at 12:30 am

    1. I guess Rothchild is correct because there are spillover and external costs on society from global warming. The costs of global warming are not taken care of by companies but by the society. However isn't global warming sometimes seen more of as one of the negative externalities of the production of certain goods? For example cars are made to gain profit, and one of the negative externalities of that market is the pollution. Global warming isn't really a production and isn't made to gain profit, so isn't it more of an externality?

    2. I learned several economic strategies for pollution control. There is the limit of pollution, which uses laws and states a specific pollution control method and emission level. There is also the incentive based regulation, where emission targets are established and industries are given incentives to reduce emissions. Government may also set acceptable levels of pollution and issue a marketable waste-discharge permits. Companies who need more pollution can buy emission reduction credits from other companies who do not pollute as much.

  2. Chan Min Parkon 16 Jan 2008 at 12:35 am

    So basically I think that since economic solutions often work, a whole market can be created for pollution control. With supply and demand or other methods, pollution could be controlled or reduced.

  3. mina.songon 19 Jan 2008 at 9:28 pm

    there are more problems for global warming, but why america is not recognizing this problem.

    I think to solve the problem, like what Chan Min said, it is one of the good way to create pollution control. this won't show the result in short time but this will bring great result in few decades.

  4. Howardon 19 Jan 2008 at 10:59 pm

    As we learned in class, we can privatize things so that people would be protective over what they own. However, the concept of pricatization cannot work here because you cant really privatize air, and even though you can regulate the smoke or Co2 that your country produce, other country's pollution may still give your skys a bad view. Perhaps finding alternitive resourses is the best solution for a long term improvment.

  5. Richard T.on 20 Jan 2008 at 3:53 pm

    I agree with Chan that global warming is an externality, it isn't made to gain profit. However, because the COMPANIES want to maximize their profit, global warming is more severe as time progresses. As howard said, you can't possibly privatize air. However, you can set pollution controls or pass out laws. For example, Kyoto Protocol. The Protocol requires developed countries to reduce their GHG emissions below certain specified levels. The Protocol places a heavier burden on developed nations under the principle of “common but differentiated responsibilities.” As we can see, this international law forces nations to reduce the GHGs emission levels, and MEANWHILE, they might be able to find an alternative resources.

  6. Jeff Yeon 20 Jan 2008 at 8:38 pm

    We discussed in class how Europe is requiring pollution emitting factories to buy permits to toxicate the air. If this can be regulated and enforced, I think this is an effective way to control the amount of CO2 released into the atmosphere. This might help a bit until new efficient ways of creating energy without fossil fuels is developed.

  7. Claire Moonon 20 Jan 2008 at 11:18 pm

    To me, this whole idea of Rothchild makes sense. The global warming is a BIG MARKET FAILURE, since its negative externalities are affecting the third party which is the people in the WHOLE ENTIRE WORLD. Therefore, the most direct way to achieve long-term reduction in the emission of greenhouse gases is to put limits on pollution as Rothchild says. There is no other way to actually reduce the emission, unless the amount of emission is reduced by legally limiting it. The negative externalities would decrease due to the effort of firms trying to change pollutions in other forms by spending more money. Therefore, I woudl say BUSH administration should make a limit on the amount of emission and support the EPA more.

  8. Sharon Lion 21 Jan 2008 at 12:02 am

    I think that to regulate pollution, a market for pollution rights should be established to encourage more eco-friendly production. Since pollution rights would need to be bought and it would be more expensive to pollute, this could also encourage producers to adopt more efficient means of production (better, cleaner technology).

  9. Howard Jingon 21 Jan 2008 at 12:02 pm

    1. In an economic sense, market failure is when the allocation of goods and services is not efficient. I don't see how global warming can be considered a market failure in this sense since nobody is actively trying to welcome or purchase global warming (I hope).

    Instead, I agree with the general consensus that global warming is one giant negative externality. Although many people in developed worlds buy cars and gasoline, nobody is paying for cleaning up all the excess carbon dioxide in the atmosphere. In this sense, global warming is a negative externality because it effects everyone, even though the car engine is the thing doing the polluting.

    2. Taking a command based approach on controlling pollution is not very effective as there is no real incentive to stop polluting. Moreover, if every company can only pollute X amount of waste products no matter the industry, the cost of pollution abatement will eventually become too high that it would be cheaper to just declare bankruptcy as the company starts feeling the law of diminishing marginal returns.

    3. Instead, the market based approach is more efficient, where there is still a strict cap on how much you can pollute, but you can trade the right to pollute with other companies. This way, if you are in a pollution intensive industry, such as electricity manufacturing, you can purchase credits off of a company that finds pollution abatement to be cheap, such as an insurance company.

  10. kevin maon 21 Jan 2008 at 7:38 pm

    1. In an economic sense i guess he is correct. Global warming is one big negative externality affecting everyone in the world. Like the polar bears and us.

    2. Imposing a limit the how much one can pollute is not the BEST way to the reduction of greenhouse gases, but it is better than nothing. Imposing a limit will force businesses to find an expensive way to get rid of their waste.

    3. I agree with Howard on this question. Having strict cap on pollution and trading credits for polluting. This will keep pollution under control and at a certain amount. As technology gets better, the amount of pollution can be decreased.

  11. julie.linon 21 Jan 2008 at 10:03 pm

    Global warming could be said as a market failure because selfish firms over allocate wasteful and toxic chemicals into the environment that create negative externalities for us, who breath this air and drink this water. This is a giant market failure because permits can be sold and purchased, firms that produce less pollutants could easily sell their pollution permits to other companies and gain profits from them instead of discarding excess permits. this is like giving the firm the right to pollute the air AND letting them gain profits from doing so.

  12. Matt Rothchildon 25 Oct 2008 at 7:36 am

    Please correctly spell the last name of the person of whom you write. His name is "Rothschild", not "Rothchild". Please make the proper corrections to this site as people are getting confused about MY identity.

  13. Jhonon 14 Jul 2014 at 8:50 pm

    Nice post, you are phenomenal in this post and share some useful points about global warming. I bookmarked your page and waiting for your next post.

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