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

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.

(1) Derive the socially optimal global level of avoided climate change that should be undertaken.

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