1. 1 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

2. 2 INTRODUCTION u Purpose: to understand the ethical & economic foundations of natural resource issues u Learning Objectives: 1. Explain the fundamentals of ethics & relation to environmental/natural resource issues. 2.Provide a summary review of economic theory basics. u 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 Natural Resource Economics : An Introductory Textbook, draft unpublished text.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.

3. 3 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

4. 4 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.

5. 5 Ethics: Some Fundamentals u Ethics--branch of philosophy concerned w/moral duty & ideal human character u Intrinsic rightness (Deontological Ethics) –what’s desirable (hypothetical imperative) –what’s necessary (categorical imperative) –Rawls “Justice” (fairness concept) –Leopold & “Deep Ecology” u Instrumental value (Teleological Ethics) –end justifies means if desirable consequences result (consequentialism) –Natural Law & Utilitarianism

6. 6 Ethics: Some Fundamentals (cont) u Logical fallacy to believe that sciences of “what is” can be applied to “what ought” u Environmental Ethics--examines the moral basis of environmental responsibility; 3 competing theories 1.Anthropocentrism 2.Species rights 3.Ecocentrism

7. 7 Utilitarian Principles & Economics u Benefit Cost Analysis –preferred policy or choice: B > C & Net Benefits are greatest u Pareto Efficiency Criterion –policy can’t reduce the welfare of others u Pareto Superior –winners must compensate losers u Kaldor-Hicks Criterion –winners must have potential to compensate losers

8. 8 Alternative Methods of Economics relate to inclusion of ethics u Positive Economics –evaluates “what is” (the observable) »the scientific method –objectivity is key u Normative Economics –determines/suggests “what ought” to be done »based on the norms/standards of society/culture –biased is assumed/explained in the process

9. 9 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 don’t have a voice? --What’s fair & to whom?

10. 10 Market Allocation u Pure/perfect markets don’t exist u Market capitalism--independently-functioning institution to allocate scarce resources/goods/services 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

11. 11 Market Allocation (cont.) u Flow of spending & markets & efficiency u Supply & Demand & market equilibrium u Consumer Surplus--when willingness-to-pay is greater than price paid u Producer Surplus--when price received is greater than willingness-to-sell u Market failure--when any of conditions required for well-functioning competitive market not met

12. 12 The Flow of Spending in the Economy RENT, WAGES, INTEREST LAND, LABOR, FINANCIAL CAPITAL HOUSEHOLDSBUSINESSES GOODS & SERVICES MONEY PAYMENTS FOR GOODS & SERVICES GOVERNMENT FINANCIAL MARKETS LOANS SAVINGS LOANS TAXES TRANSFER/FACTOR PAYMENTS TAXES PAYMENTS FOR GOODS/SERVICES

13. 13 Efficiency of Market System u Market efficiency: Qd = Qs MB = MC Net Benefits maximized for private market u Social Benefits maximized if MBp = MBs = MCp = MCs

14. 14 Market Equilibrium Price Quantity P1 Q1 D=MBp=MVp=MWTPp S=MCp=MWTSp

15. 15 Market Failure--Costs Price Quantity Q1 D=MBp=MVp=MWTPp=MBs S=MCp S’=MCs Q2 P2 P1

16. 16 Market Failure--Benefits Price Quantity P1 Q1 D=MBp S=MCp=MCs D’=MBs P2

17. 17 Market Failure u Inefficient allocation of resources u MBp = MCp u MBs = MCs u Sources –Imperfect Competition (market power) –Imperfect Information –Public Goods--property rights not assigned –Externalities--costs/benefits that don’t accrue to economic unit that creates them

18. 18 Market Efficiency Issues u Equity –Efficiency may not be Equitable »Distribution may be a problem »“Best” is determined by Society u Dynamic Efficiency –Static: 1 time period or multiple time periods independent of each other –Dynamic: Multiple time periods, dependent on each other [Pt+1 = f (x,y, Pt, z)]