ERE3: Ethics

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ERE3 Ethics

• Foundations
• Why is ethics so important?
• Alternative views, including the standard
  economic position
• Time dimensions
• Discounting
• Sustainability

2
Last week

• The origins of the sustainability problem
• State of the environment
• Growth and the environment
• The environmental Kuznets curve
• Concepts of sustainability
• Definitions, meanings, conceptualisations

3
Why Ethics?

• Environmental economics is about the allocation,
  distribution and use of environmental resources
• Some of these questions are positive, many are
  normative
• Mainstream economics is based on a utilitarian
  ethic
• Utilitarianism is not universally accepted,
  applied environmental economists are constantly
  confronted with this

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Foundations

• Naturalist moral philosophy
• Humanist moral philosophy
• Libertarianism
• Utilitarianism
• Social welfare
• Distributional implications
• Intertemporal welfare
• Rawls
• Other criticism

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Naturalism

• Most ethics reason from a human perspective,
  either attributing values to humans only or
  letting humans be the only source of value
• Naturalist moral philosophy extends moral rights
  to other species
• Higher animals
• Sentient beings
• Living beings
• Beings in existence

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Libertarianism

• Individual rights and liberties
• Primacy of process
• Locke Original property is just if acquired
  through labour
• Nozick Property is just if obtained through free
  consent
• No concept of consequential justice
• No role for distributional policy
• Government has a role in
• Unjust holdings
• Open access, common property
• Externalities

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Utilitarianism

• Individual pleasure, happiness, well-being
• Individual utility and social welfare
• Primacy of outcome
• No concept of procedural justice
• Government policy should strive for the greatest
  good for the greatest number
• Narrow utility is individual, human utility
  welfare is sum of utilities
• Broad utility includes altruism and future
  availability

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From utilities to welfare

• How should an economy be ruled?
• Welfare is some function of utilities
• Cardinal or ordinal utility functions?
• What are the implications?
• Interpersonal comparisons
• Policy implications

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Social welfare functions

• Individual utility
• Social welfare
• What functional form?

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Welfare maximisation
Solution requires Equality of the individuals
marginal utilities
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Maximisation of social welfare subject to a
constraint on the total quantity of goods
available
XA
Z
XA
W3
W2
W1
XB
0
XB
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Maximisation of social welfare for two
individuals with different utility functions
UA
UB
UA
UB
XB
XA
XA
XB
Are equal weights fair?
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Rawls

• Justice is what everyone would agree to if all
  were free, rational and impartial
• Veil of ignorance Skills, position, attitude
• Fundamental principles
• Maximum liberty, no infringement on others
  liberties
• Resource difference only if
• It makes everyone better off
• Attached to position
• Often reinterpreted in a utilitarian way
  maximise the worst off
• Rawls may have disagreed with that

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Rawlsian social welfare function indifference
curve
U2
e
c
d
b
45
U1
0
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Other criticism

• Naturalism, libertarianism
• Utility is too narrow, there is more than goods
  and services, e.g., freedom
• Besides individual utility, there is altruism and
  responsibility
• Utilitarianism may lead to repugnant conclusions

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Examples of decision-making problems

• The problems
• Reducing air pollution in Santiago
• Protecting the habitat of the California
  gnatcatcher
• Costs and benefits of the Three Gorges dam
• How might the outcome differ depending on
• Social choice mechanism
• Composition of society

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Intertemporal Welfare
Possible functional form using weights

• p is the utility discount rate (pgt0)
• Future utility counts less
• What is the rationale for discounting?

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Discounting
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Utility and Consumption

• Consumption discount rate r??g
• It is the rate at which the value of a small
  increment of consumption changes as its date is
  delayed

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Marginal utility of consumption
Marginal utility to time
Elasticity of marignal utility
Consumption discount rate
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Numerical Values?

• r??g
• ? is the utility discount rate, measures how much
  we care about the future
• ?g reflects that future consumers are better off
• ? (elasticity of marginal utility) is usually
  assumed to lie between 1 and 2
• g (growth rate of consumption) can be observed
• ? is controversial

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Numerical Values? (2)

• There is no ethical position that defends ?gt0
• Indeed, Ramsey, Harrod, and Koopmans said ?0
• Yet, market and government behaviour suggest
  otherwise ...
• It would not be wise to set different discount
  rates for different projects

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Interest rates

• Interest rate discount rate rate of return on
  capital
• Higher values
• Only allowed if there are no market failures
• Only allowed if properly corrected for
  differences in risk
• There are arguments why a government should
  correct behaviour, and arguments why not

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Sustainable Development

• Adjust social welfare function to incorporate
  sustainability
• Solow Intergenerational equity a la Rawls
• ? equate utility over time
• Pezzey Change the arguments in the utility
  function
• Impose constraints
• Capital, natural capital, utility
• Adjust discount rate
• Lower exponential discount rate, non-exponential
  discount rate

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Alternative Discount Rates

• Lind, Rabl, Schelling Discounting is only
  allowable within the life-time of a single
  decision maker, as the presumed capital transfers
  are not possible between generations
• Heal Observations in psychology show that people
  use lower discount rates for problems with longer
  time horizons
• Weitzman The certainty equivalent of an
  uncertain discount rate resembles a discount rate
  that declines over time