My Nobel Prize Winning Blog Post

Last week, the 2018 Nobel Prize in Economics was awarded to William Nordhaus and Paul Romer, both of whom have studied how governments can use policy to address climate change. Nordhaus, an economist at Yale, has spent a majority of his time over the past decades trying to convince governments to combat climate change by imposing a tax on carbon emissions. Romer, of NYU, has written about how government policy plays a key role in technological innovation. Both of these economists have done fantastic work in their research on climate change and have deservedly been recognized. Their research also has a clear and obvious relationship to our class, so it would feel like a missed opportunity to not discuss their work on this blog.

Carbon emissions create a negative production externality, and therefore the social marginal costs are greater than the private marginal costs. Thus, firms overproduce goods that create carbon emissions. Nordhaus argues that taxation is the best way to combat this market failure. Coase’s market solution would not work in solving this issue due to two reasons. Firstly, property rights would be difficult to define. How does one divide the air into different properties? Secondly, even if property rights could be defined correctly, Coase’s solution would still encounter the free rider problem. There are a large number of firms that are liable for air pollution, so firms would be reluctant to commit to reducing emissions. Because of these two reasons, there is not an adequate market solution, and the government must impose taxes such that the private marginal cost of production equals the social marginal cost.

Taxation on carbon emission is a form of government policy that incentivizes technological innovation. As firms are taxed for their pollution levels, they are incentivized to invest in the research and development of technology that decreases pollution, which should decrease marginal costs and increase marginal utility. This, theoretically, should lead to a decrease in future pollution. Therefore, the effects of a tax on pollution have two major effects- a social equilibrium in the present, and an improvement in future technology. Hopefully, Nordhaus and Romer’s recognition as Nobel Prize winners will bring publicity to their economic research, and convince governments to use public choice theory to save our environment.

*This is obviously a very simplified summary of their Nobel Prize winning work. I recommend reading more Nordhaus’s climate change solutions and Romer’s growth theory online.