Environmental Externalities

Gernot Wagner's recent New York Times article addresses the problem of market externalities in relation to the global climate crisis. Carbon dioxide pollution is seriously damaging to "economies, ecosystems and health," but individuals are not made to pay the full costs of their own carbon emissions. As a result, we have ended up with what Wagner calls "planetary socialism": a classic case of negative externalities, in which society as a whole bears the costs of individual actions. In order to preserve our climate, we as a society must collectively reduce our emissions, but there are no incentives in place to force individuals to make these necessary cuts. In Wagner's view, the best way to solve this problem would be through a government-imposed limit on total carbon emissions (a "cap-and-trade" system).
The argument for government intervention runs counter to the ideas of the Coase Theorem. Coase argued that, given adequately defined property rights, the problem of externalities could be solved through the free market: negotiations between the producer of an externality and the affected party could lead to the 'internalization' of the externality (the individual costs of the action would adjust to reflect its social costs.) However, in this case, a Coasian solution might not be a viable option. Such a solution would face serious challenges, such as the "Assignment Problem" outlined by Gruber. For instance, we can't realistically assign property rights to the air we breathe. And it would be equally difficult to assign blame for environmental damage: if all of our emissions together are contributing to this damage, there is no easy way to determine the degree of blame to assign to each individual person. Government intervention is likely the best solution in this case.