Human action is responsible for rising concentrations of so-called greenhouse gases in the earth’s atmosphere. If left unchecked, this negative externality may increase the average temperature of our planet, which of course will have several harmful effects to our environment. If production of greenhouse gases is to be reduced to its efficient rate, individuals must somehow be induced to act as though they bear all the costs of their actions. This can be done by enacting the appropriate regulation and taxation. The problem, however, is that the benefits of these policies seemed to be not so obvious. To a certain extent, the costs of these policies may be greater than the benefits that it brings. The very uncertainties that surround the possible warming of the planet suggest that policy prescriptions of the sort that have been proposed may be too much, and too soon.
In the absence of externalities, market mechanisms are capable of achieving Pareto efficient allocations (there is no other way to make some people better off without making anybody else worse off). If externalities are present, the market will not necessarily result in a Pareto efficient provision of resources. However, there are other social institutions such as the legal system (or government intervention) that can “mimic” the market mechanism to some degree and thereby achieve Pareto efficiency. The problem with the case of greenhouse gases is that the benefits of government regulation are still to a major extent uncertain. Hence, there is still a possibility that the costs of these policies being recommended might be greater than the benefits. It might be the case that these policies are too costly, and even too soon. The government would then become the cause of inefficiency in this case.
There’s no doubt that greenhouse gases are negative externalities, and they will produce consequences that we all will eventually bear. Government is the only body that can potentially help mitigate the problem. They just have to ascertain that positive outcomes do come out of imposing certain regulations to ensure that the benefits outweigh the costs.