The Problem of Climate Change in Terms of Market Failures

Sometimes markets work well and sometimes they do not. In the case of climate change, they are failing. Considered economically, climate change can be understood as a form of market failure associated with greenhouse gas pollution because the climate change that follows imposes costs on all people, not just the polluters. These costs include damage to their health, insurance costs (to protect against increased flooding ) or the costs of �climate-proofing’ our homes as the world gets hotter. There are several possible causes of market failure including public goods, the tragedy of the commons, collective action, free riders, and externalities, etc.

1) Public Goods

The market usually does not function very well when it comes to public goods as the public goods have no price in them. Price can be assigned when there are property rights attached to the goods. That is exactly what is happening with public goods --- they lack property rights or are having ill-defined property rights. Imposing property rights means that we give the right to utilize the goods to some one, some entities and clubs. Meanwhile, the characteristics of public goods are non-excludability and non-rivalry. Non-excludability means that it is impossible to prevent individuals from utilizing the good. Non-rivalry means that the consumption of the goods by an individual does not reduce the available amount for others to consume.

Carbon dioxide (CO2) and other GHG are emitted to the earth atmosphere. Meanwhile, the atmosphere itself is a public good. It is non-excludable as everyone in the earth can emit anything to it or breathe the air from the atmosphere. It is non-rivalry since my emission does not reduce others’ rights to emit. It does not have price and thus no available market mechanism. In the end, when everyone emits GHG and CO2 to the atmosphere, then there will be excessive stock pollutions in the atmosphere. Moreover, it is subsequently causing climate change.