Home » Coastal Environment » Why do economists describe climate change as a ‘market failure’?


Why do economists describe climate change as a ‘market failure’?


Unregulated markets have overproduced CO2 because the costs are not priced into the transaction

When free markets do not maximise society’s welfare, they are said to ‘fail’ and policy intervention may be needed to correct them. Many economists have described climate change as an example of a market failure – though in fact a number of distinct market failures have been identified.

The core one is the so-called ‘greenhouse-gas externality’. Greenhouse gas emissions are a side-effect of economically valuable activities. Most of the impacts of emissions do not fall on those conducting the activities – instead they fall on future generations or people living in developing countries, for example – so those responsible for the emissions do not pay the cost. The adverse effects of greenhouse gases are therefore ‘external’ to the market, which means there is usually only an ethical – rather than an economic – incentive for businesses and consumers to reduce their emissions. As a result, the market fails by over-producing greenhouse gases.

Economists concerned about this market failure argue for policy intervention to increase the price of activities that emit greenhouse gases, thereby providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low-carbon technologies. In order to ensure that emissions cuts are spread out across the economy as inexpensively as possible, economists tend to favour policies that ensure that all businesses and households face the same price on carbon – such as a tax on emissions or an emissions trading scheme.

The greenhouse gas externality is accompanied by a number of other market failures, including those arising from a lack of information about how to reduce emissions, network effects and a lack of innovation incentives. These call for a package of interventions including, but not restricted to, a price on carbon, according to economists concerned about climate change.

For example, new networks are likely to be important in several areas of low-carbon energy supply – such as the ‘smart’ electricity grid and electric vehicle charging points. But such networks can be difficult to establish through market forces alone, because in the early days of a network the benefits may be very limited, despite the potentially huge benefits that can be achieved once the network reaches a critical mass. Take electric vehicles: they’re inconvenient if charging points are few and far between, but much more useful once a large network of charging points is established. (This is an example of a positive type of externality: when a network increases in size, every member of the network benefits, even though they have not paid for this benefit.) As a result, policy support may sometimes be necessary to help kick-start useful networks.

In the case of innovation, markets currently fail to offer sufficient incentives for the development of low-carbon technologies. An innovative idea that can be copied or used with no financial payment for its inventor may not materialise in the first place, as there is little incentive to invest in developing the idea. Policy interventions such as subsidies for R&D can help to overcome this barrier.

• This article was written by Alex Bowen, Simon Dietz and Naomi Hicks of the Grantham Research Institute at LSE in collaboration with the Guardian


No comments

Be the first one to leave a comment.

Post a Comment

You must be logged in to post a comment.


Recent Post

Hacked By Chinafans

Hacked By Chinafans Share this:TweetEmailPrint Related


Is there anyone to give right answer of these aassesment? I think You will be able to get the progress of Bangladesh in Flood controls and management shortly. To...

Issue of this week (21 August, 2016)

Issue of this week (21 August, 2016)

site de rencontre pour promener son chien prostitute how to site de rencontre cv prostituee et mst club rencontre solo rencontre edarling jeu virtuel gratuit de...


Very Good News for Bangladesh!!

It has been published in a daily newspaper that about 16 sq. km land is emerging every year in the coastal area of Bangladesh (Source: Prothom Alo, 05 August, 2016)....


Issue of this week

Coastal Tourism Potentiality in Bangladesh Bangladesh has a very beautiful coastal landscape. It can attract both local and foreign tourist. Do you think coastal...


Accidental Oil Pollution in the Sundarbans: Preparedness for Response to Ecological Disaster

Abstract: Sundarbans is the largest single mangrove forest of the world. This forest occupies near about 10,000 sq km of which Bangladesh includes about 6,000 sq....


Climate Change Induced Tropical Cyclone and Salinity Intrusion in the Sundarbans: An Impediment to the REDD Programs

Reducing Emissions from Deforestation and Forest Degradation in developing countries, or REDD for short, is a broad set of approaches and actions that will reduce...

The Suspended Sediment Loads of Ganges and Brahmaputra basin

The Suspended Sediment Loads of Ganges and Brahmaputra basin

prostituee villeparisis rencontre chaude kinshasa prostituees red dead redemption rencontre artisanal sombernon comment faire rencontre gratuite rencontres bd aix...

Modern sediment supply to the lower delta plain of the Ganges-Brahmaputra River in Bangladesh

Modern sediment supply to the lower delta plain of the Ganges-Brahmaputra River in Bangladesh

rencontres ellezelles prostituee reze centre recherche rencontre paris les dix commandements la rencontre ballouchi tunisie rencontre rencontre femme vallet rencontre...

Congratulations to Cricket Team of Geography and Environment

Congratulations to Cricket Team of Geography and Environment

We are very pleased to inform all our PG-DU.com members that, Geography and Environment department of University of Dhaka has finally got the “Inter-department...