A formal economic model and negative externality

Question 1

According to Nordhaus, what is the best way to induce a large stable international coalition to deal with climate change?

Answer 1

Climate Clubs with penalties for non-members is the most fruitful mechanism to deal with climate change and achieve climate mitigation efforts and abatement efforts from most countries, overcoming the Free-rider problem that comes with the prisoner’s dilemma.

Question 2

Present a short description of what constitutes a Climate Club

Answer 2

• an agreement by participating countries to undertake harmonized emissions reductions
• could center on an “international target carbon price”
• nonparticipants are penalized
  - uniform percentage tariffs on the
  imports of nonparticipants into the club
  region
• creates a strategic situation in which
  countries acting in their self-interest will choose to enter the club and undertake high
  levels of emissions reductions because of the structure of the incentives

Question 3

Write the formular for country i’s welfare (W)

Answer 3

Question 4

What features of damage (D) in the simple economic model of climate change give countries the potential to free-ride?

Answer 4

:)

Question 5

What is a negative externality?

Answer 5

A negative externality occurs when an agent making a decision does not pay the full cost of the decision.

Question 6

What is the external cost?

Answer 6

The external cost (=social cost - private cost) is a real cost but is paid by people who have no control over the action that created that externality.

Question 7

What is the social cost?

Answer 7

The social cost is the cost of a good to society

Question 8

What is the private cost?

Answer 8

The private cost is the cost the consumer or
producer is paying for a good

Question 9

What is the main point about negative externality?

Answer 9

Agents usually take decisions based on their private costs and benefits, and since they don’t take into account the external costs, the resulting outcome is not efficient from an aggregate point of view.

Question 10

Why does increasing the number of
countries in climate mitigation agreements lower abatement costs

Answer 10

Question 11

Greater national abatement takes place when…

Answer 11

• Countries are larger
  
  • They take damages more seriously because they receive a bigger fraction of them
    (- doesn’t take into account that countries experience different damages)