Market Failure, Global Warming and Mr. Arthur C. Pigou

On 30th October 2006 The Stern Review on the Economics of Climate Change was released though not the first report of its kind but one the most widely discussed. The 700 page report was prepared by a Economist Prof Nicolas Stern for the British Government.
The Report linked climate change with the growing amount green house gases caused by the rapid industrial growth and demands an immediate and effective response from governments around the world to restrict emissions.
Mr. Stern exclaimed “It is the greatest and the widest ranging market failure ever seen”
And to top it of the world faced a major economic recession in the ensuing years; what does it all point to?.
Why has the free market - so often hymned as infallible by right-wing economists - allowed this situation to arise? And why have governments not intervened before now to protect us against this extreme example of market failure?
Co-incidentally another forgotten English Economist predicted these phenomenon in the early 1940’s;Mr.Arthur Cecil Pigou pioneered the study of Market Failure –the branch of economics that explores why free enterprise sometimes fails, during the 1930’s Mr. Maynard Keynes lampooned him as a ‘reactionary’ because of his suggestion that the economic slump would eventually recover on its own accord (the economic depression of 1929). A student of the great Victorian Economist Prof. Alfred Marshall who regarded Pigou as a budding economics genius and even recommended him for his chair at Kings College,Cambridge.
Economics textbook have long contained sections on how free markets fail to deal with the negative spillovers such as pollution,traffic congestion and the likes. Mr. Pigou was never credited for his hypothesis on Free Market spill overs , His then radical ideas of Taxing Polluters and making Health Insurance compulsory were met with indifference: Keynesianism was all the rage then.Mr Pigou said His Goal was to explore ways in which “it now is,or eventually may become,feasible for governments to..promote the economic welfare of their citizens as a whole”
Mr. Pigou drew an important distinction between private and social value of economic activities for eg; A fertilizer factory opening up in a rural area creates employment and wealth for the residents willing to work in the factory but it creates environmental damage and creates potential risk for people who are not getting anything out of the factory. The key to solve this problem as suggested by Mr. Pigou that though government interference towards compensation is an option but In some cases ,the parties concerned might be able to come to a voluntary agreement on how to compensate innocent bystanders in this case the people not working in the factory and the neighboring environment. For Instance a landlord may reduce rents of tenants who have to live over a noisy bar in the hotel.
In the aftermath of 1929 depression Mr. Pigou claimed “The actual occurrence of business failures will be more or less widespread according to whether bankers’ loans are more or less readily available”. Nobody could imagine that a small,obscure part of the credit markets-The SubPrime Mortgage Insutry waould prime the world financial markets to its knees due to shortage of credit.
Today Mr. Pigou’s Intellectual legacy is being rediscovered and Unlike those of Messers ,Keynes and Friedman it enjoys Bi-Partisan appeal ,the Left and Right seem to be in agreement with Pigovian Economics also Leading economist such as Greg Becker, Greg Mankiw joined democrats such as Paul Krugman and Amartya Sen in recommending Pigovian approach ro policy. Much of President Barack Obama’s agenda—Financial Regulation, Cap and Trade (regarding Emmision Caps),Health Care Reforms- are application of Pigovian Principles. A principle that is finding its way into economies aound the world including India with Prime Minister Manmohan Singh hinting at Financial Reforms and Credit Market Regulation in Budget 2010. The United Nations Climate Change Conference Copenhagen 2009 is another step towards carbon caps for a better management for economic spillovers. At Harvard Greg Mankiw founded the informal Pigou Club for Economists supporting Carbon Tax. His broad views of including the Environment as ‘innocent bystander’ and predicting Markets who ignore these innocent bystanders are doomed to fail have made him more relevant today than ever before. But Mr. Pigou was a optimist and believed the things are never too bad to be meanded. He believed in progress,the power of rational analysis and the ability of well intentioned people,such as himself to effect meaningfull reforms. He didnt put much emphasis on mathematical models for forcasting rather was a practical person; in one of his greatest books ‘The Economies of Welfare’ he wrote “We shall endeavor to elucidate, not any generalized system of possible worlds—But the actual world of men and women as the are found in experience to be”