by an average 5.2 percent below 1990 levels by 2012. Developing nations
pledged reductions but were not bound by specific amounts or a timetable. As
indicated earlier, part of the plan calls for a worldwide trading program in car-
bon dioxide emissions. By this mechanism, developing nations could collect
significant monetary sums from industrialized countries for reducing GHG
emissions below specified targets. However, to date, the United States has failed
to sign the treaty. With the sharp divisions between the political parties and the
slow recovery from the economic recession, the immediate economic cost of
ratifying the treaty has been deemed to be too great.^11Promoting Positive Externalities
A positive externality occurs when a particular activity has beneficial side effects
on parties other than those producing the activity. For instance, efforts to
improve literacy and education levels in a particular segment of the popula-
tion benefit not only the individuals themselves but also society as a whole. By
limiting the onset and spread of disease, vaccination programs protect the gen-
eral population, including those who are not vaccinated.
Left to their own devices, economic agents in unregulated markets tend to
undertake too few activities that generate positive externalities. (This is simply
the converse of the previous proposition that agents generate too much nega-
tive externalities.) The appropriate government intervention is either to man-
date or subsidize greater levels of these beneficial activities. In the United
States, education is publicly provided and is mandatory through certain grade
levels. Similarly, vaccinations against common diseases can be obtained for free
and are mandatory. The following example illustrates the use of subsidies to
promote beneficial activities.PROMOTING RESEARCH In the United States, private universities and firms
undertake the vast majority of basic research leading to new scientific and tech-
nological knowledge. As a concrete example, consider a firm engaged in basic
research that is contemplating embarking on an R&D program to produce a
superior flame-retardant fabric. The firm estimates the expected gross profit of
the program (in present-value terms) to be $12 million. It also recognizes that
the program will generate external benefits to society as a whole (to consumers
and other firms who develop copycat fabrics). These external benefits come to
an estimated $6 million. Finally, the firm’s total cost of undertaking the R&D
program is $15 million.464 Chapter 11 Regulation, Public Goods, and Benefit-Cost Analysis(^11) For more on the economics of global warming, see R. S. Tol, “The Economic Effects of Climate
Change,” Journal of Economic Perspectives(Spring 2009): 29–51; and W. J. McKibbin and P. J.
Wilcoxen, “The Role of Economics in Climate Change Policy,” Journal of Economic Perspectives
(Spring 2002): 107–129.
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