Transcript Document

The Economic
Approach to the
Environment
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1. Utilitarian background
2. Problems
3. Economic Theory
4. Environmental Econ
5. Challenges
Ethics
Utilitarianism
Libertarianism
Egalitarianism
Utilitarianism
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Utilitarianism
•
This has been the dominant ethical theory in US public policy over the last 60
yrs--though it has been strongly attacked, primarily on the grounds that it
doesn’t give sufficient protection to the individual.
•
Utilitarianism is a version of Consequentialism. Consequentialism says that
one should judge an action morally by its consequences: one should
maximize the good. An action/policy is right if the consequences of its
contribution are no worse than its alternative’s consequences.
•
What is the good? Welfare. What is welfare?
– Mental state of happiness?
– Satisfaction of actual preferences?
– Satisfaction of rational and informed preferences?
• An action is right if it maximizes total
or average welfare.
• Scope? What count as
consequences?
• Axiology? All consequentialist
theories need a measure of relative
value of consequences. Need to be
able to rank-order options in terms
of utility.
• Decision rule? Tells which option is
right one given what is furnished by
axiology.
Distribution
• The theory doesn’t offer a distributional
principle. But arguably, sometimes the
principle of declining marginal utility
might imply that (say) the pain imposed
on a rich person by taking some of his
money is offset by the pleasure
obtained by the poor person as a result.
Worries
• Can we make interpersonal
comparisons of well-being?
• Whose welfare counts?
(animals?)
• Avg versus total happiness?
(pop?)
• Should pleasure from crime
count?
• Innocent person case;
happy slave case, etc.
• Utilitarianism suffers from more
problems. But it remains a strong
ethical theory because in principle at
least one can simply calculate the right
thing to do. One is given a clear guide
to action.
Cost Benefit Analysis
• CBA is a particular method in
economic theory.
• It has been at the center of
various environmental disputes.
– ESA
– Clean Air Act
– 1936 Flood Control Act
– Reagan’s 1981 Executive Order 12291
and OMB
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DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP
'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty
industries to the LDCs [Least Developed Countries]? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased
morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the
country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind
dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've
always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly
inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated
by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high
prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity.
The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to
be much higher in a country where people survive to get prostate cancer than in a country where under 5 mortality is
200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing
particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic
pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a nontradable.
The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain
goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less
effectively against every Bank proposal for liberalization.
“Measures of economic value are based on what
people want -- their preferences. Economists
generally assume that individuals, not the
government, are the best judges of what they
want. Thus, the theory of economic valuation is
based on individual preferences and
choices. People express their preferences through
the choices and tradeoffs that they make, given
certain constraints, such as those on income or
available time. The economic value of a particular
item, or good, for example a loaf of bread, is
measured by the maximum amount of other things
that a person is willing to give up to have that loaf
of bread. … Thus, economic value is measured by
the most someone is willing to give up in other
goods and services in order to obtain a good,
service, or state of the world. …This is often
referred to as willingness to pay.”
Preference Bundles
Bundle A:= {a1,a2,a3…an}
Bundle B:= {b1,b2,b3…bn}
Assumptions: preferences are not lexicographic and
actor has unlimited wants.
• Value arises from maximization of
satisfaction, based on preferences and
relative cost, within a bound set of
alternatives
• Societal value is given by simple algebraic
summation of individual valuations
• “For society, the net value of a proposed
change in resource allocation is the
interpersonal sum of WTP for those who
stand to gain minus the interpersonal sum of
WTA for those who stand to lose as a result of
the change.” Randall
• Don’t confuse actual
prices with
economic value
revealed by
willingness to pay.
Prices are
equivalent with WTP
value only in certain
limiting cases.
Discounting
• Let the interest rate be r. Then a dollar
invested today for t years will grow to be
worth (1+r)t dollars. So the equivalent of
a dollar in the future is (1+r)-t dollars
now.
• Economists take this into account, but
when/where/how are all controversial
Economic or Allocative
Efficiency
• Pareto optimality: a state in which it’s not
possible to rearrange production and
consumption so as to make one person better
off without making others worse off. Counts
as acceptable any policy in which no one is
made worse off.
f
i
There are
infinitely
many PO
states
f’
i’
Kaldor-Hicks Criterion
• KH counts as acceptable any policy
that produces more benefits than
costs.
• If benefits given to winners > loss
suffered by losers, then reservoir can
be built, which, in principle, could be
used to compensate losers.
– Who do we compensate?
– When should we compensate?
– See image online
“The mainstream economic
approach is doggedly
nonjudgmental about
people’s preferences: what
the individual wants is
presumed to be good for
that individual.” Freeman
Anthropocentrist
Instrumental
Utilitarian
Can Economists “Price” NonMarket Environmental Goods?
• Yes! How to do this is the
subject of environmental
economics. Many
ingenious methods have
been discovered that
enable the pricing of
environmental goods.
www.ecosystemvaluation.o
rg/1-03.htm
Doctrine of Allocative
Efficiency
• The doctrine holds that environmental policy
should be shaped by maximum efficiency in
the allocation of resources necessary to
produce wanted goods and services.
• Defense: goal of public policy should be the
maximization of human satisfaction & human
satisfaction = human preferences
Criticism
• Some environmental problems do arise as a result of the failure
of markets to reflect in their pricing the true benefits/costs.
Economists often can devise imaginative solutions to these
problems, e.g., emission taxes.
• But should allocative efficiency be the sole goal of public policy?
• The basic problem: the doctrine attempts to answer the question
of what we ought to prefer by appealing to a doctrine that takes
our actual preferences as normatively correct.
• Should government be solely an engine for maximizing
preferences, or should it be an instrument for securing some
vision of the good life?
– Transformative values, e.g., CA anti-smoking campaign, recycling
– Should slavery, civil rights, women’s suffrage be decided by CBA?
More Challenges
• Practical and Principled
– Substitutability
– Cost benefit analysis versus cost
effectiveness analysis
– Ignorance