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The Economic Approach to the Environment 1.Utilitarian background 2.Problems 3.Economic Theory 4.Environmental Econ 5.Challenges.

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Presentation on theme: "The Economic Approach to the Environment 1.Utilitarian background 2.Problems 3.Economic Theory 4.Environmental Econ 5.Challenges."— Presentation transcript:

1 The Economic Approach to the Environment 1.Utilitarian background 2.Problems 3.Economic Theory 4.Environmental Econ 5.Challenges

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3 Utilitarianism

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5 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?

6 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.

7 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.

8 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.

9 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.

10 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 and OMB

11 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 non- tradable. 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.

12 “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.”

13 Preference Bundles Bundle A:= {a 1,a 2,a 3 …a n } Bundle B:= {b 1,b 2,b 3 …b n } Assumptions: preferences are not lexicographic and actor has unlimited wants.

14 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

15 Don’t confuse actual prices with economic value revealed by willingness to pay. Prices are equivalent with WTP value only in certain limiting cases.

16 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

17 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. i f i’ f’ There are infinitely many PO states

18 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

19 “ 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

20 Can Economists “Price” Non- Market 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. org/1-03.htm

21 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

22 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?

23 More Challenges Practical and Principled –Substitutability –Cost benefit analysis versus cost effectiveness analysis –Ignorance


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