Global public goods pose special problems because no single nation can capture all the benefits of its own pollution-control efforts. To see this, redraw Figure 14-5 , labeling it “Emissions Reduction for the United States.” Label all the curves with “US” to indicate that they refer to costs and benefits for the United States alone. Next, draw a new MSB curve which is 3 times higher than the MSB US at every point to indicate that the benefits to the world are 3 times higher than those to the United States alone. Consider the “nationalistic” equilibrium at E where the United States maximizes its own net benefits from abatement. Can you see why this is inefficient from the point of view of the entire globe? ( Hint: The reasoning is analogous to that in Figure 14 -3 .)
Consider this issue from the point of view of game theory. The Nash equilibrium would occur when each country chose the nationalistic equilibrium you have just analyzed. Describe why this is analogous to the inefficient Nash equilibrium described in Chapter 10—only here the players are nations rather than firms. Now consider the cooperative game in which nations get together to find the efficient equilibrium. Describe the efficient equilibrium in terms of global MC and MSB curves. Can you see why the efficient equilibrium would require a uniform carbon tax in each country?