2. WHAT BASIC VALUE SYSTEMS

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2. WHAT BASIC VALUE SYSTEMS ECONOMIC
THEORY FORM THE FOUNDATION TO STUDY NATURAL
RESOURCE ISSUES?SPRING 2002

• Larry D. Sanders

Dept. of Ag Economics Oklahoma State
University
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INTRODUCTION

• Purpose to understand the ethical economic
  foundations of natural resource issues
• Learning Objectives
• 1. Explain the fundamentals of ethics relation
  to environmental/natural resource issues.
• 2. Provide a summary review of economic theory
  basics.
• References (in addition to Hackett text)
• Hite, J.C., W. D. Mulkey. Natural Resource
  Economics An Introductory Textbook, draft
  unpublished text.
• The Internet Encyclopedia of Philosophy
  (www.utm.edu/research/iep/e/environm.htm)
• Rolston, H. Environmental Ethics, Temple
  University Press, 1988.

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Whether or not we are aware of it or can express
it, ethics seem to matter. . . .

• That there ought to be some ethic concerning the
  environment can be doubted only by those who
  believe in no ethics at all. For humans are
  evidently helped or hurt by the condition of
  their environment.
• --Holmes Rolston, 1988

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Some environmentally ethical claims...

• 1. As long as more people are better off,
  development should proceed.
• 2. Humans should be responsible for the welfare
  of animals.
• 3. Animals have a right to a quality of life and
  protection.
• 4. Land owners should be free to do what they
  want on or with the land.
• 5. The world was made for man and man was made to
  rule conquer earth.

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Ethics Some Fundamentals

• Ethics--branch of philosophy concerned w/moral
  duty ideal human character
• Intrinsic rightness (Deontological Ethics)
• whats desirable (hypothetical imperative)
• whats necessary (categorical imperative)
• Rawls Justice (fairness concept)
• Leopold Deep Ecology
• Instrumental value (Teleological Ethics)
• end justifies means if desirable consequences
  result (consequentialism)
• Natural Law Utilitarianism

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Ethics Some Fundamentals (cont)

• Logical fallacy to believe that sciences of what
  is can be applied to what ought
• Environmental Ethics--examines the moral basis of
  environmental responsibility 3 competing
  theories
• 1. Anthropocentrism
• 2. Species rights
• 3. Ecocentrism

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Utilitarian Principles Economics

• Benefit Cost Analysis
• preferred policy or choice B gt C Net Benefits
  are greatest
• Pareto Efficiency Criterion
• policy cant reduce the welfare of others
• Pareto Superior
• winners must compensate losers
• Kaldor-Hicks Criterion
• winners must have potential to compensate losers

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Alternative Methods of Economics relate to
inclusion of ethics

• Positive Economics
• evaluates what is (the observable)
• the scientific method
• objectivity is key
• Normative Economics
• determines/suggests what ought to be done
• based on the norms/standards of society/culture
• biased is assumed/explained in the process

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The Key Fundamental Questions of Economics

• 1. What goods/services are produced?
• 2. How are goods/services produced?
• 3. Who gets benefits costs?
• NOTE Often not discussed are related
  important ethical questions such as
• --Who decides?
• --Who/what/how to represent the voices of those
  who dont have a voice?
• --Whats fair to whom?

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Market Allocation

• Pure/perfect markets dont exist
• Market capitalism--independently-functioning
  institution to allocate scarce resources/goods/ser
  vices w/capital privately-owned individuals
  driving the system motivated by self-interest
• centuries old evolving
• golen age during Industrial Revolution in 19th
  century
• the ethical dimension has driven evolution

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Market Allocation (cont.)

• Flow of spending markets efficiency
• Supply Demand market equilibrium
• Consumer Surplus--when willingness-to-pay is
  greater than price paid
• Producer Surplus--when price received is greater
  than willingness-to-sell
• Market failure--when any of conditions required
  for well-functioning competitive market not met

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The Flow of Spending in the Economy
GOVERNMENT
TRANSFER/FACTOR PAYMENTS
PAYMENTS FOR GOODS/SERVICES
TAXES
TAXES
RENT, WAGES, INTEREST
LAND, LABOR, FINANCIAL CAPITAL
HOUSEHOLDS
BUSINESSES
GOODS SERVICES
MONEY PAYMENTS FOR GOODS SERVICES
SAVINGS
SAVINGS
FINANCIAL MARKETS
LOANS
LOANS
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Efficiency of Market System

• Market efficiency
• Qd Qs
• MB MC
• Net Benefits maximized for private market
• Social Benefits maximized if
• MBp MBs MCp MCs

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Market Equilibrium
SMCpMWTSp
Price
P1
DMBpMVpMWTPp
Quantity
Q1
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Market Failure--Costs
SMCs
SMCp
Price
P2
DMBpMVpMWTPpMBs
P1
Quantity
Q2
Q1
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Market Failure--Benefits
SMCpMCs
Price
P2
DMBs
P1
DMBp
Quantity
Q1
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Market Failure

• Inefficient allocation of resources
• MBp MCp
• MBs MCs
• Sources
• Imperfect Competition (market power)
• Imperfect Information
• Public Goods--property rights not assigned
• Externalities--costs/benefits that dont accrue
  to economic unit that creates them

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Market Efficiency Issues

• Equity
• Efficiency may not be Equitable
• Distribution may be a problem
• Best is determined by Society
• Dynamic Efficiency
• Static 1 time period or multiple time periods
  independent of each other
• Dynamic Multiple time periods, dependent on
  each other Pt1 f (x,y, Pt, z)