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{"id":3417,"date":"2014-03-21T15:30:19","date_gmt":"2014-03-21T15:30:19","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=faqs&p=3417"},"modified":"2023-12-11T13:26:34","modified_gmt":"2023-12-11T13:26:34","slug":"why-do-economists-describe-climate-change-as-a-market-failure","status":"publish","type":"faqs","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/explainers\/why-do-economists-describe-climate-change-as-a-market-failure\/","title":{"rendered":"Why do economists describe climate change as a market failure?"},"content":{"rendered":"\n

When free markets do not maximise society’s welfare, they are said to ‘fail’ and policy intervention may be needed to correct them. Many economists

The core one is the so-called ‘greenhouse-gas externality’. Greenhouse gas emissions

Most of the impacts of emissions do not fall on those conducting the activities – instead they fall on future generations or people living in developing countries, for example – so those responsible for the emissions do not pay the cost. The adverse effects of greenhouse gases are therefore ‘external’ to the market, which means there is usually only an ethical – rather than an economic – incentive for businesses and consumers to reduce their emissions. As a result, the market fails by over-producing greenhouse gases.<\/p>\n

Economists concerned about this market failure argue for policy intervention to increase the price of activities that emit greenhouse gases, thereby providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low-carbon technologies

The greenhouse gas externality is accompanied by a number of other market failures, including those arising from a lack of information about how to reduce emissions, network effects and a lack of innovation incentives. These call for a package of interventions including, but not restricted to, a price on carbon, according to economists concerned about climate change.<\/p>\n

For example, new networks are likely to be important in several areas of low-carbon energy supply – such as the ‘smart’ electricity grid and electric vehicle charging points. But such networks can be difficult to establish through market forces alone, because in the early days of a network the benefits may be very limited, despite the potentially huge benefits that can be achieved once the network reaches a critical mass.<\/p>\n

Take electric vehicles

In the case of innovation, markets currently fail to offer sufficient incentives for the development of low-carbon technologies. An innovative idea that can be copied or used with no financial payment for its inventor may not materialise in the first place, as there is little incentive to invest in developing the idea. Policy interventions such as subsidies for R&D can help to overcome this barrier.
\nThis article was written by Alex Bowen, Simon Dietz and Naomi Hicks and is a reproduction of the following article “Why do economists describe climate change as a market failure?