Developing countries and paying for climate change.

An informative video from Deutsche Welle on climate change and the options available to reduce global emissions. The developed world has contributed 70% of the stock of greenhouse gases causing global warming but developing economies now contribute over 63%. Economies now need to accelerate their investment into green technologies especially in the developing world. But how are they going to fund it? Outside of China, the high cost of capital in developing countries – almost always two or three times the cost in developed economies – means we are only seeing a trickle of the necessary foreign private investment. The video refers to Climate Reparations, Tax Big Oil, Pollution Levies and Canceling Debt.

This issue can be represented by a negative externalities of production graph which is part of the A2 and NCEA Level 3 syllabuses.

• When there is a negative production externality, marginal social cost (MSC) exceeds marginal private cost (MPC), as in Figure 1.

• Firms take decisions on the basis of MPC, so the market settles at Q1, rather than at Q*.

• The shaded area represents the welfare loss for society in this position – i.e. the damage caused by ‘slash’.

• This is where there is ‘slash’ caused by the forestry companies which imposes costs on households, farms, infrastructure etc that are not reflected in the costs faced by the forestry company.

Externalities – Key definitions

• Private cost or benefit: a cost that is incurred (or a benefit that is enjoyed) by an individual (firm or household) as part of its economic activities

• External cost: a cost that is associated with an individual firm or household’s production or other economic activities that is borne by a third party, and is not reflected in market prices

• Social cost: private cost plus external costs

• Marginal social cost: the cost to society of producing an extra unit of a good

• External benefit: a benefit that is associated with an individual firm or household’s production or other economic activities that is received by a third party, and is not reflected in market prices

• Social benefit: private benefit plus external benefits

• Marginal social benefit: the benefit received by society from consuming an extra unit of a good

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