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In their publication Carbon Conundrum, Philip Booth and Carlo Stagnaro write as follows (p 16):

Global warming was described ... by Stern ... as the biggest market failure the world has ever seen. This is a tendentious description. We cannot define and trade property rights in an atmosphere containing a given level of carbon dioxide. Market participants cannot, therefore, benefit from their own actions in reducing carbon emissions or bear the costs of emissions. There is simply an absence of a market here - the market has not failed. Describing climate change as a market failure is like describing a car as a 'car failure' if it cannot sprout wings and fly.

Question Does the distinction drawn here between market failure and the absence of a market make sense, and if so which concept is more relevant to the case of climate change?

My thoughts: The distinction does seem to make sense. Market failure seems to suggest a) property rights in a certain type of good; b) the possibility of trading in that good; but c) the outcome of trading is for some reason sub-optimal. The absence of a market for a good, by contrast, seems to suggest either d) an absence of property rights for the good (eg because the good is too abundant for such rights to be worthwhile, or perhaps because the nature of the good makes enforcement of property rights difficult), or e) trading of the good is difficult or impossible (eg because of distance and transport costs).

Booth and Stagnaro are correct to imply that there is an absence of a market in rights to (share in) an atmosphere containing a given level of carbon dioxide. Such rights would be unenforceable. But it seems to me that they are wrong to imply that the idea of market failure is irrelevant to climate change. Market failure, in the form of an externality, is present in markets for all the many goods whose production or consumption is associated with carbon dioxide emissions. The fallacy, in the above-quoted passage, seems to lie in focusing too narrowly on the market (or absence thereof) for the atmosphere itself, and not on all the other markets which, through their associated emissions, affect the atmosphere and in turn the climate.

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  • $\begingroup$ I aggrege with you, but question of whether it makes sense seems bit opinion based, how do we objectively answer whether it makes sense? In economic literature people do draw distinction, hence clearly many economists believe it makes sense, but these authors disagree, this could be nice discussion but discussions do not fit Q&A format. $\endgroup$
    – 1muflon1
    Commented Apr 15 at 23:18
  • $\begingroup$ "there is an absence of a market in rights to (share in) an atmosphere containing a given level of carbon dioxide." I am not sure I understand this; is the claim that CO2 emmission cap&trade are not working, or is this a reframing from emmissions to "sharing the atmosphere"? In latter case, seems like a bit of a misdirection. $\endgroup$
    – Giskard
    Commented Apr 16 at 4:38
  • $\begingroup$ @Giskard I intended "rights to (share in) an atmosphere containing a given level of carbon dioxide" as a shorthand for rights to the protection from or mitigation of global warming that such an atmosphere may provide. Such rights would be unenforceable because it is implausible that there could exist a global authority or sufficient voluntary global coordination to ensure the limitation of global emissions that would be necessary given global mixing of the atmosphere. An exception would be if the "given level" is whatever is the actual level at the time. $\endgroup$ Commented Apr 16 at 18:04
  • $\begingroup$ "it is implausible that there could exist a global authority or sufficient voluntary global coordination to ensure the limitation of global emissions that would be necessary" Isn't this implausibility in the realm of politics, and as such opinion based here? There are similar globally coordinated treaties albeit with less economic impact regarding ozone layer depleting gases and nuclear testing. $\endgroup$
    – Giskard
    Commented Apr 17 at 5:57
  • $\begingroup$ Hi @AdamBailey. I haven't read environmental/ecological lit in 10 years or so (including Stern). However, I think Stern's point may be 'market failure' = 'externalities,' rather than 'market failure' = 'absence of a global trading market in carbon.' Stern goes on to prescribe this type of thing, of course. But on a descriptive level, I think by market failure Stern means the existing consumer-good/intermediate good markets (in 2007) have externalities. $\endgroup$
    – EB3112
    Commented Apr 17 at 13:33

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In general, we describe a market failure in one of four categories, "the nature of the market", "the nature of the goods", "the nature of exchange", and "RBC variance". While there is an argument to be made that within category three (the nature of exchange) there is an incomplete market, that more has to do with the presence of a market that already exists, mainly markets where perfect risk transfer is impossible. As such the argument that climate change is a market failure is valid. While we all agree it is a "failure of markets", market failures are well defined and do not include climate change.

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    $\begingroup$ Welcome to the site and thank you for your answer. I'm a bit puzzled by your last two sentences which seem to contradict each other - have I misunderstood? $\endgroup$ Commented Apr 19 at 15:17
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    $\begingroup$ A market failure is a category of things, specifically failures within a market well defined within economics. A failure of the market is just a thing we call bad under the situation we are in. Poverty is not a market failure, there is nothing categorically wrong with poverty and we do not classify it as a market failure. But we both agree it is bad, maybe I was being too coy, but I called things like poverty a "failure of markets" but they are not contained in the well-defined category of a market failure. $\endgroup$ Commented Apr 19 at 16:36

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