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Global warming and economic externalities


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.

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Corresponding author

Correspondence to Armon Rezai.

Additional information

We received helpful comments from Larry Karp and an anonymous referee. Support from the Schwartz Center for Economic Policy Analysis is gratefully acknowledged.

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Rezai, A., Foley, D.K. & Taylor, L. Global warming and economic externalities. Econ Theory 49, 329–351 (2012).

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  • Global warming
  • Growth with negative externalities
  • Optimal economic growth

JEL Classification

  • D62
  • O41
  • Q54