William Nordhaus has won a share of the 2018 Nobel Prize in Economics for his contribution to climate economics. In this post from Ideas for India, Dean Spears discusses Nordhaus’ work and its implications for India. He contends that India is even more climate-vulnerable than realised by the Nobel laureate’s quantitative model that describes the interplay between the economy and climate.
Climate change may be the greatest externality that human economies have ever suffered. When I take an Uber from CR Park to the Indian Statistical Institute in Delhi, the exhaust fills the air we all share. When the coal plant in Kanpur generates energy to electrify villages in the state of Uttar Pradesh, the smoke diffuses for miles. Power plants and airplane flights in the US decades ago are already warming the atmosphere into which Indian children are born today. And all of us who are rich enough to be reading a blog are participating in emissions that will change lives for future generations.
That sounds like a daunting problem for economists. But, in fact, the solution is simple enough to be included in every introductory microeconomics class. The optimal response to an externality is to internalise it: make sure decision-makers have to pay the social marginal cost....Read More..