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?

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Welfare maximisation

Amax s.t. XA B BW U U X X

A A B B A BL U X U X X X X

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Solution requires: Equality of the individual‘s marginal utilities

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Maximisation of social welfare subject to a constraint on the total

quantity of goods available

if , A B A BU U X X

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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°

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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?

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0 10

...1 1 1 1

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T tt

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Possible functional form using weights:

Discounting

0 1t

tt

UW

0

dtt

t

W U e t

0% 1% 10%

Year 0 100 100 100

Year 50 100 60 0.85

Year 100 100 37 0.07

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

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Marginal utility ofconsumption

Marginal utility to time

Elasticity ofmarignal utility

Cr

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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