ERE3: Ethics

1. 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

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

5. 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

6. 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

7. 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

8. 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

9. Social welfare functions • Individual utility • Social welfare • What functional form?

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

11. Maximisation of social welfare subject to a constraint on the total quantity of goods available XA Z XA* W3 W2 W1 XB 0 XB*

12. Maximisation of social welfare for two individuals with different utility functions UA UB UA* UB* XB* XA XA* XB Are equal weights fair?

13. 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

14. Rawlsian social welfare function indifference curve U2 e c d b 45° U1 0

15. 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

16. 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

17. 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:

18. Discounting

19. 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

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

21. 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

22. 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

23. 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

24. 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

25. 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