An Economic Approach to Climate Change

Economics is the study of choices, and how they are made compatible. The issue of global warming can be viewed in the context of a set of choices that lead to climate change. In a free society choices are made compatible via the price system. If prices do not reflect the true cost of carbon, then carbon intensive production and consumption choices may not be compatible given the choice sets across all members of society. For example, my choice to burn fossil fuels may be incompatible with your choice to live in a coastal area given certain climate change scenarios. Economic literature is rich in analyzing situations where choices are incompatible, (often referred to as externalities) and proposing solutions. This presentation reviews some of the literature and economic theory related to externalities, and focuses on two particular economist’s approaches to climate change in this context