ERE3: Ethics Foundations –Why is ethics so important? –Alternative views, including the standard economic position Time dimensions –Discounting –Sustainability

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

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

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

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

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

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

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

Social welfare functions Individual utility Social welfare What functional form?

Welfare maximisation Solution requires: Equality of the individual‘s marginal utilities

Z XBXB W2W2 0 XAXA XA*XA* W1W1 W3W3 XB*XB* Maximisation of social welfare subject to a constraint on the total quantity of goods available

XA*XA* XAXA XB*XB* XBXB UB*UB* UA*UA* UBUB UAUA Maximisation of social welfare for two individuals with different utility functions Are equal weights fair?

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 other‘s 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

45° 0 U1U1 U2U2 e c db Rawlsian social welfare function indifference curve

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

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

Intertemporal Welfare p is the utility discount rate (p>0) Future utility counts less What is the rationale for discounting? Possible functional form using weights:

Discounting 0%1%10% Year 0100 Year Year

Utility and Consumption Consumption discount rate r=ρ+ηg It is the rate at which the value of a small increment of consumption changes as its date is delayed

Marginal utility of consumption Marginal utility to time Elasticity of marignal utility Consumption discount rate

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

Numerical Values? (2) There is no ethical position that defends ρ>0 Indeed, Ramsey, Harrod, and Koopmans said ρ=0 Yet, market and government behaviour suggest otherwise... It would not be wise to set different discount rates for different projects

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

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

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