Chapter 02: Ethics and Economics

Question 1

What is the difference between normative and positive economics?

Answer 1

Positive: Focuses on what is

Normative: Focues on what should be

• “How much pollution is too much”
• Requires clearly stating underlying ethical assumptions

Question 2

How is environmental protection policy normative economics?

Answer 2

Environmental protection = normative (opinion). Must care about the environment for it to be important (depends on which standard you use)

Question 3

What is utilitarianism?

Answer 3

The environmental cleanup is important solely for the happiness (utility) it brings to people, now and the future

• Moral philosophy underlying economics
• Do something, not for moral or ethical reasons, for benefit humanity

Question 4

What is biocentrism?

Answer 4

Independent of the utility of doing so, people have
a moral responsibility to treat earth with respect

Alternative to utilitarianism

Important (not traditional focus)

Question 5

What is utility and how does goods factor in to utility?

Answer 5

What Makes People Happy?

Utility - measurement of happiness

“Goods” including anything and all things desired

U(market goods, nonmarket goods)

• Market Goods: tomatoes, shoes
• Nonmarket Goods: clean air, charity, scenery

Positive, direct relationsihp between consumption of goods and utility = UTILITY FUNCTION

Question 6

What is the utility function?

Answer 6

Ex. Utility person named Aldo

• Bad things - turn on its head - absense of said good
  
  • “ Absense of pollution”
• Everyone’s utility function is different > must combine for a society

X_A = bundle goods Aldo consumes

Then:

Question 7

How does adding pollution affect the utility function?

Answer 7

Utility_A = U_A(X⁺_A, P^-_A)

• “-” Utility decreases with additional exposure to pollution
• Trade-off between growth in consumption and improvement in environmental quality

Utility only measures goods (good) - so a good (addition to utility) would be the “absence of pollution”

Question 8

What is the “more is better assumption”?

Answer 8

“More is Better” Assumption:

Economics often make assumption that more is better for utility

(i.e. Aldo always happies with more goods)

• Diminishing marginal return come into play (each addition is happiness is smaller than previous addition in happiness)
• Some point: benefits not worth the costs

Question 9

What do these equations show in relation to utility?

U_p = X₁ + X₂ and U_p = X₁ + 2X₂

Answer 9

Ex: U_p = X₁ + X₂

• They have the same value
• Substituteable & same wieght

Not exibit diminishing marginal returns: Would add a square root?

Ex: U_p = X₁ + 2X₂

• Still substituteable - but not the same weight (not 1:1 ratio)
• Generalized (alpha and beta just positive constants)

PERFECT SUBSTITUTES (examples above)

Ex: tea and coffee

Question 10

What does the equation illustrate?

U = min{x1, x2}

Answer 10

Ex: U = min{x1, x2}

• Take the smaller of the two - must have at least one of each
• Must increase both (equal to count as additional happiness)
• must have together (mutually dependent)
• Combine market and nonmarket goods

PERFECT COMPLEMENTS (example above)

Ex: biking and clear air

Ex: steering wheel and tires (must be 1:4) - must have certain proportion

U = min{x_w, x_t}

U = min{4x_w, x_t}

• to come to 1:1 ratio (1 wheel to 4 tires)

U = min{ax_{<span>1</span>}, bx_{<span>2</span>}}

Question 11

What is the difference between perfect substitutes and perfect complements?

Answer 11

• Complements are goods that are consumed together.
• Substitutes are goods where you can consume one in place of the other.

Question 12

What is social welfare (compared to utility)?

Answer 12

Does increases in individual consumption increase overall welfare of society?

Incorporates the concempts of fairness and rights

Social Welfare Function:

Make assumptions about “fairness” explicit and a “desirable” way of adding up individual utilties

Question 13

What is the social welfare function as a function of utility?

Answer 13

Some of the individual utility functions (hard to add up happiness):

SW = U_R(X⁺_R, P^-_R) + U_{<span>J</span>}(X⁺_J, P^-_J) + …

• Operates under “greatest good for the greatest number of people”
• Equal Marginal Utilities of Consumption assumption

Question 14

What is a utility function for social welfare under the efficiency standard?

Answer 14

Ex: W = U₁ + U₂

EFFICIENCY STANDARD

(My and your happiness)

• Substitutes: society is substitutional (1:1)
  
  • Generally more concerned with efficiency than safety
• No concern for who gets it, just that someone gets it - no concern with fairness
  
  • Explicitly unfair to maximize efficiency

Question 15

What is a utility function for social welfare under the safety standard?

Answer 15

Ex: min[U₁, U₂]

SAFETY STANDARD

(Society’s wellbeing smallest of individual utilities)

• “Welbeing of the world, only as good as the most suffering country”
• Fairness concidered

Question 16

How does the efficiency standard work for social welfare?

Answer 16

Above is “adding up” mechanism underlying an efficiency standard for pollution control

Idea is that maximize net benefits of economic growth

• Without reference who bears the costs or gains

Defending the Efficiency Standard:

• Proponents - most people will benefit (over time) if net economic benefits from pollution control are maximized (Equal Marginal Utility of Consumption Assumption and Pareto Efficiency)
• Lower prices of consumer goods for majority must be balanced against protection of environment quality and health

To determine “correct” level pollution from society = weigh one person’s consumption agianst anothers

Equal Marginal Utility of Consumption:

Additions to consumptions are valued equally by all individuals

* Implicit behind the efficiency standard*

Question 17

What is the equal margin utility of consumption?

Answer 17

Equal Marginal Utility of Consumption:

Additions to consumptions are valued equally by all individuals

* Implicit behind the efficiency standard*

Question 18

Why does efficiency not equate to fairness?

Answer 18

• No protection low income people (no concern intragenerational fairness)
• No protection well-being future generations
• No protections for pollution victirms (no differentiation between rights of polluters and victims)

Question 19

How does the sustainability standard relate to social welfare?

Answer 19

Protect the welfare future generations

Social welfare not rise if increases in consumption today comes expense of welfare children

Must use “fairness weight” to ensure fairness to future generations

Sustainability Social Welfare Function:

SW = w*U_R(X⁺_R, P^-_R) + U_J(X⁺_J, P^-_J) + …

• R - “average” person not yet born and J - “average” person today
• w is a weighting number big enough to insure that increases in J’s consumption do not substantially penalize R

Increasing individual happiness today cannot come at the expense future generations

Question 20

How does the safety standard relate to social welfare?

Answer 20

People have a right to protection from unsolicited damage to health

Safety Social Welfare Function:

SW = U_R(X⁺_R, w*P^-_R) + U_J(X⁺_J, P^-_J) + …

Use a “fairness weight” on pollution

• Suppose R lives downhill from J’s steel factor = exposed air pollution (P_R)
• Social welfare rises substantially less with production of steel than with less-polluting commodities
• w large enough would essentially refuse to balance polluting steel process against harmful impacts