Question

Assume that the earth’s climate is a global, non-excludable public good in that each individual citizen in each country in the world cannot be excluded from the benefits of greenhouse gas mitigation efforts by other countries. For the sake of this example, assume that there two countries in the world, Country One and Country Two. Each Country has its own individual willingness to pay (i.e., marginal benefits) for avoiding climate change damages from greenhouse gas emissions in its own Country. These estimates are:

            Country One: P = 550 – Q₁

            Country Two: P = 650 – Q₂

where

P is the willingness to pay (i.e., marginal benefits) in $/ton from a reduction in greenhouse gas emissions for each country, and

Q₁ and Q₂ are the reductions (i.e., abatement) of greenhouse gas emissions (in tons) by Country One and Country Two, respectively.

Assume for simplicity’s sake that the marginal cost of reducing greenhouse gas emissions (in $/ton) is constant across the world at $200.

Assume that Country Two wants to show “leadership” on climate change. With leadership, Country Two’s willingness to pay to avoid climate damage now becomes P = 700 – Q, instead of P = 650 – Q. Given Country Two’s show of leadership, how much would Country Two abate? What would be Country One’s response in terms of its level of emissions abatement? With Country Two’s show of leadership, what would be the combined level of emissions abatement for the two countries? How would the overall level of abatement of the countries now compare to the social optimal global level of abatement?

Answer 1

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