Question

  Economics of climate change. How do economic activities affect the climate and what are the advantages and disadvantages of various economic instruments (such as taxation, cap and trade mechanisms, etc.) to address the adverse effects of human activities on the climate?

Answer 1

Economic activities affect environment adversely as manufacturing activities lead to increase in pollution level in the economy. This increases the concentration of carbon dioxide in the atmosphere. Thus, economic activities affect the climate adversely by increasing the pollution level in the economy. Some of the economic instruments are used such as taxation, cap and trade mechanism, etc to address adverse effects of human activities on climate. These have controlled the level of pollution in the economy. However, taxation leads to deadweight loss in the society and reduces the overall level of total welfare in the economy. Thus, total surplus in the economy declines.

These instruments are needed to control the level of pollution and lead to sustainable development of the nation.