Economic Theory

, Volume 49, Issue 2, pp 329–351 | Cite as

Global warming and economic externalities

  • Armon Rezai
  • Duncan K. Foley
  • Lance Taylor


Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence, there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto improvement from mitigation investment and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.


Global warming Growth with negative externalities Optimal economic growth 

JEL Classification

D62 O41 Q54 


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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Department of SocioeconomicsVienna University of Economics and BusinessViennaAustria
  2. 2.Department of EconomicsNew School for Social ResearchNew YorkUSA

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