With Copenhagen on our minds, some remarkably incisive commentary coming from — of all places — the IMF. Here’s Carlo Cottarelli, the Director of the Fund’s Fiscal Affairs Department:
The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.
It’s an externality, stupid — so price it.
An informed citizen trying to follow the debate may easily become overwhelmed. But Cottarelli is right: the economics principles here are pretty straightforward.
(Hat tip: Peter Martin)
and 
. You can also watch it on 
I guess pricing externalities isn’t simple to me.
What do you do with the moneys raised?
How do you set targets for desired behavior that isn’t influenced by the revenue?
Are we sure it won’t cause secondary affects that aren’t desirable, like moving economic activity to black markets?
Nothing simple about it, if you ask me.
Pricing pollution is the right idea, but how? Auctioning off permits and then allowing them to be traded gives an unfair benefit to firms that can afford to buy permits. What about the new start-up or the smaller company?
What are some other approaches that might work?
Not so easy to price complex systems with imperfect information…
The problem is that the probabilities are not only unknown but also, in a certain sense, unknowable.
Isn’t this the same debate at one remove? Externality = anthropomorphic global warming, right? Simply calling it an externality shortcuts the debate about if and how much our carbon activities are contributing. Doesn’t seem like a meaningful designation.
This is a case where the collection mechanism is known (taxes), and we have eager recipients – scientists, politicians, companies that have bought politicians, and NGOs eager to take a slice out of the pie they distribute.
But what is NOT known if the externality cost is real, or if so what its cost is, nor what the cost of injecting the externality into the pricing is..
Externalities – simple as throw away lines from bureaucrats at corrupt international finance institutions. Not simple at all in practice.
But it still doesn’t fix the pollution problem. Paying a carbon tax fixes nothing so it holds no value.
Clean water however is now becoming more of a high value commodity that it’ll become political soon. This is already the case in parts of Africa and Australia.
IMF should be investigating the far reaching monetary impact of water instead.
As an economist who used to work for the White House and is right now sitting at the negotiations in Copenhagen, one thing I have learned is how much of the world, the simple models of economics does not capture. I agree completely that the economics of externalities are straightforward, but without even dipping into the many scientific uncertainties and political hurdles, even the economics is not so simple when you add in innovation and learning by doing which is a crucial component of addressing climate change, not to mention equity concerns when the main polluters for the next 50 years have only a fraction of the income compared to the developed world, and equity cannot be fixed by direct transfers for a wide variety of reasons.