ENVIRONMENTAL ECONOMICS | LECTURE 2: SOCIAL CHOICE

Environmental Economics and Social Choice

 Foundations
 Why is ethics so important?
 Alternative views, including the standard economic position
 Sustainability
 Environmental economics compliments public economics
 It is normative

Why Ethics?

 Environmental economics: a discipline concerned about the allocation,

distribution and use of environmental resources
 Some of these ethical questions are positive, whereas others are normative
 Mainstream economics is based on utilitarian ethics
 However, utilitarianism is not universally accepted

Foundations

 Naturalist moral philosophy

 Humanist moral philosophy
 Libertarianism
 Utilitarianism
 Social welfare
 Distributional implications
 Intertemporal welfare
 Rawls
 Other criticism

Immanuel Kant

 Introduced the idea of a “moral agent” and “universality”

 Moral agent: most basic design of a human being
 Universality: if a rule applies to one moral agent, it applies to any
Naturalism

 Naturalist moral philosophy extends rights to other species

Extending rights to:
 Poor
 Females
 Non-whites
 Higher animals
 Sentient beings
 All beings including rocks
 Overall, there are many different moral agents of different genders, ethnicities
and colour
 Utilitarianism is about the government doing the greatest good for the greatest
number of people
 Utility: pleasure, satisfaction, absence of pain

Libertarianism

 Libertarianism is one of the two school of Humanism

Focuses on:

 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

 Utilitarianism is about individual pleasure, happiness and wellbeing

 Individual utility and social welfare
 Primacy of outcomes
 Contains no concept of procedural justice
 Says that government policy should strive for the greatest good for the greatest
number
 Two approaches to utility

Narrow: utility is individual, human utility; welfare is sum of utilities

Broad: utility includes altruism and non-humans; welfare is some function of

utilities

Welfare theory

 Welfare theory states that Situation A is Pareto Superior to Situation B if at least

one is better off, and none are worse off
 A situation is Pareto Optimal, or Efficient if there are no Pareto Improvements
 Situation A is a potential Pareto Improvement to Situation B if it is Pareto
Superior after transfers, that is if the winners compensate the losers
 Potential means that some people are better off and others worse off
 However, the winners compensate the losers

Welfare theorems

First welfare theorem: a perfectly competitive market is a Pareto Optimum

 This implies leaving everyone to their own devices and collective bargaining

Second welfare theorem: Any Pareto Optimum can be achieved as a perfectly

competitive equilibrium with the appropriate reallocation of resources

Arrow

If there are:

 2 agents and 3 goods (or 3 agents and 2 goods), and

 Utility cannot be compared, then
 Individual preferences (utility functions) cannot be aggregated to social
preferences, a social welfare function that satisfies:
1. Non-dictatorship
2. Unrestricted domain
3. Independence of irrelevant alternatives
4. Monotonicity
5. Non-imposition
6. Pareto efficiency (monotonicity and non-imposition)

Rawls

 Believed that 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
 Rawls may have disagreed with maximising the utility of the worst off

Other criticisms

 The definition of utility is too narrow

 There is more than just goods and service e.g. freedom
 Freedom is not a human concept but a societal concept
 Standard utility does not include freedom
 Besides individual utility, there is also altruism and responsibility
 Utilitarianism may lead to repugnant conclusions
 Thus, utilitarianism is a poor description of behaviour
Sustainability

Sustainable development: development that meets the needs of the present without
compromising the ability of future generations to meet their own needs

 i.e. we should live our lives without ruining the lives of those who will come after
us

Sustainability comprises of:

1. Weak sustainability
 Non-declining utility
 Non-declining production opportunities
 Non-declining yields of resource services

2. Strong sustainability
 Non-declining natural capital stocks
 Ecosystem stability and resilience

3. Social Construct
4. All of the above, plus efficiency and equity

What does non-declining utility mean?

Pezzy: utility should not fall

Hartwick: consumption should not fall

Solow: consumption should be constant

Non-declining production opportunities

 Solow, Page
 Q = Q (L, KH, KN)
 No assumption about what consumption is, utility
 Production for whom?
 What is production?
 What time scale?
 Substitution is allowed

Non-declining natural capital stocks

Strong sustainability: no substitution is allowed

 Taken literally, this stops everything

 In practice, some substitution and compensation must be allowed, but how
much?
 Is spatial substitution allowed? Or, at what spatial scale?
 What stocks are maintained? Habitats, species, genes?
 What to do with viruses and pests?

Non-declining yields of resource services

 Back to an anthropocentric viewpoint, or not?

 Depends on services to whom?
 What are services?
 What time scale?
 What spatial scale?
 Substitution is allowed, as long as the service is generated

Ecosystem stability and resilience

 An ecocentric viewpoint, or is it?

 Is stability measured as stably as human needs?
 What is stability, resilience?
 Are ecosystems naturally stable?
 Beyond a point, no substitution of manufactured stocks and activities for natural
stocks and processes

A social construct

 Sustainability is, of course, defined as society would like to define it

 There is no objective definition possible
 Some argue that if only we get the procedure of defining sustainability right …
 This is an example of a political goal jumping the environmental agenda
Sustainability, equity and efficiency

 The sustainability debate includes issues of distributional justice and economic

efficiency
 The concept of sustainability cannot be blurred
unless for political reasons