Chapter 02: Ethics and Economics Flashcards
What is the difference between normative and positive economics?
Positive: Focuses on what is
Normative: Focues on what should be
- “How much pollution is too much”
- Requires clearly stating underlying ethical assumptions
How is environmental protection policy normative economics?
Environmental protection = normative (opinion). Must care about the environment for it to be important (depends on which standard you use)
What is utilitarianism?
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
What is biocentrism?
Independent of the utility of doing so, people have
a moral responsibility to treat earth with respect
Alternative to utilitarianism
Important (not traditional focus)
What is utility and how does goods factor in to utility?
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
What is the utility function?
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
XA = bundle goods Aldo consumes
Then:
How does adding pollution affect the utility function?
UtilityA = UA(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”
What is the “more is better assumption”?
“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
What do these equations show in relation to utility?
Up = X1 + X2 and Up = X1 + 2X2
Ex: Up = X1 + X2
- They have the same value
- Substituteable & same wieght
Not exibit diminishing marginal returns: Would add a square root?
Ex: Up = 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
What does the equation illustrate?
U = min{x1, x2}
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{xw, xt}
U = min{4xw, xt}
- to come to 1:1 ratio (1 wheel to 4 tires)
U = min{ax<span>1</span>, bx<span>2</span>}
What is the difference between perfect substitutes and perfect complements?
- Complements are goods that are consumed together.
- Substitutes are goods where you can consume one in place of the other.
What is social welfare (compared to utility)?
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
What is the social welfare function as a function of utility?
Some of the individual utility functions (hard to add up happiness):
SW = UR(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
What is a utility function for social welfare under the efficiency standard?
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
What is a utility function for social welfare under the safety standard?
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
How does the efficiency standard work for social welfare?
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*
What is the equal margin utility of consumption?
Equal Marginal Utility of Consumption:
Additions to consumptions are valued equally by all individuals
* Implicit behind the efficiency standard*
Why does efficiency not equate to fairness?
- 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)
How does the sustainability standard relate to social welfare?
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*UR(X+R, P-R) + UJ(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
How does the safety standard relate to social welfare?
People have a right to protection from unsolicited damage to health
Safety Social Welfare Function:
SW = UR(X+R, w*P-R) + UJ(X+J, P-J) + …
Use a “fairness weight” on pollution
- Suppose R lives downhill from J’s steel factor = exposed air pollution (PR)
- 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
