The Costs of Change

  • Changing Climate
  • Considering Oil Alternatives
  • Raising Pay Without Raising Wages

Editor’s note: You can now follow our musings on Twitter @NT_CTannenbaum.

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Nobel Prizes have been awarded since 1901. Each year, in each category, the selection committees have to choose from a range of impressive candidates.

Every now and then, the decision will be influenced by the group’s desire to make a strong statement on an issue of the day. The Reverend Dr. Martin Luther King Jr. was awarded the Nobel peace prize in 1964, as the U.S. civil rights movement was just gaining momentum. (His moving acceptance speech can be found here.) The literature prize in 1970 was given to Soviet dissident Aleksandr Solzhenitsyn, taking a stand against the oppression that he had endured.

In our view, this year’s Nobel Prize for Economic Sciences is also seeking to make a strong statement. One of this year’s winners, William Nordhaus, has spent his life studying the economic consequences of climate change. On the same day the award was announced, the United Nations issued a frightening report on trends in the earth’s temperature.

We won’t wade into the debate over the extent to which human activity is influencing climate. But the data show that the past several years have been the warmest in a century, and that the frequency of severe weather events has been increasing.

The impact of commerce on the environment has long been a focus for economists. Ronald Coase won the Nobel Prize in 1991 for his work in this area. One of Coase’s more famous articles was entitled “The Problem of Social Cost,” which lays out a framework for thinking about the subject. Atmospheric quality is what economists call a public good; it is shared by all who come into contact with it, but no one has absolute authority over it.

The costs of using a public good are hard to measure, and are typically not assessed and charged. This can lead to overuse. Coase, using the example of a factory and a fishery sharing the same stream, suggested that assigning property rights to one party or the other would initiate bargaining between the two that would lead to an optimal amount of pollution.

The Coase theorem has an academic elegance to it, but almost immediately runs into practical problems. The allocation of initial rights to public goods is a critical step, as one party will have to pay the other to reach equilibrium. Doing this fairly is very difficult. And environmental conditions are a shared global concern, bringing additional complexity to the problem.