Friday, November 6, 2009

Global Warming

Here, Robert P. Murphy provides a wealth of useful links and his usual incisive insight and analysis into the world's largest, most significant, hypothesized externality --- CO2 induced global warming. I say "hypothesized" because I am not persuaded that anything like all the science is in on the issue. And even if it were, I am completely certain that all the economics is not in on the issue.

As all students of ECON 101 will likely recall, a negative externality is a cost borne by someone who had no choice in the action that generated the cost. Economic thinking teaches us that resources will be used inefficiently when significant externalities prevail. That's because decisions about how to use scarce resources will not take account of all the costs (or all the benefits) that arise from using scarce resources in particular ways. The world is full of negative externalities (and positive externalities, too).

For example, if I start a pig farming operation next door to your home, the stench will likely be a cost you bear, even though you had no choice about whether I would go into the pig farming business or not. Moreover, since I'm not bearing the cost of the stench, the cost doesn't affect my decision about pig farming. Without some way of internalizing the stench cost, with voluntary exchange alone, we will end up using too many scarce resources for pig farming and not enough scarce resources for other valuable activities. With just a little thought, you can generate endless examples of negative and positive externalities.

Education is probably the easiest example of a positive externality. I benefit when your child is educated, even though I have no part in the choice of how much education and what quality of education your child will get. If that externality is not somehow internalized, with voluntary exchange alone, we will end up using too few scarce resources to educate children.

Standard economic thinking about externalities teaches us that externalities could be internalized if all resources were owned by someone, and if transactions costs of negotiating contracts to use scarce resources were zero (read about the Coase theorem here). Problem is, all resources are not owned by some one and transactions costs are not zero.

So far, that fact has led any number of people to conclude that we should all consent to government coercing us to do whatever a small number of people say we should do about any significant externality. Lovers of liberty and Austrian economists like me immediately reject that idea.

But in 2008, a majority of Americans decided to elect a Congress and a President who evidently don't love liberty all that much. As a result, we may get a cap-and-trade law that enriches Al Gore and Nancy Pelosi while the rest of us get to endure much higher electricity bills. But never mind that, let's get back to Murphy's excellent article and the issues at stake.

The hypothesis that global warming is mostly due to CO2 emissions is definitely a hypothesis about the world's largest ever externality. Incidentally, we have approximately 6.7 billion people who are CO2 emitters all around the globe. We also have about a gazillion production processes that emit CO2 or cause more CO2 to be emitted by using the scarce resources called energy, the most famous being coal-fired power plants.

If CO2 is actually a pollutant, as the U.S. Environmental Protection Agency now claims, and if burning fossil fuels really does produce the world's largest negative externality, then you, my friend, are a polluter --- and you are imposing external costs on the rest of us by continuing to choose to breath.

One of a few things must be true. Either there is no God, or CO2 is not the scourge of humankind, or God has a really twisted sense of humor.

Whether you believe the globe is now warming over a long, sustained, and accelerating trend; and whether you believe that CO2 emissions generated by humans (either by breathing or by burning fossil fuels) is the chief culprit; and whether you believe the science is all in on the issue; and whether you believe that the future for humans will be catastrophic if we don't quit emitting so much CO2 into the atmosphere --- or not --- you will benefit from reading Murphy's article and by reading all the links he so thoughtfully supplies.

I propose that we all take a deep breath, step back a bit, and quit throwing political and ideological bombs about global warming. Let's get the science all in --- and if you think it is all in, you just haven't read enough yet; let's get the economics all in --- I'm almost certain you haven't read enough about the economics of the issue yet; neither have I; and for sure, let's get the politicians and the political maneuvering all out --- right now, the politics of global warming is about all we're getting.

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