Lecture 2 Ethics, Welfare and Environment Flashcards
Explain the difference between positive and normative analysis.
Economics highlights the separation of positive (fact-based, what happens if…?) analysis from normative (value-based, what should we do if…?) analysis.
Explain the normative basis of economics
Normative economics has its roots in humanist moral philosophy, liberalism, and utilitarianism.
Humanist moral philosophy: Rights and duties are accorded exclusively to human beings. Human beings are seen as the source of values
Libertarianism is a humanist moral philosophy with a focus on individual rights and freedom. There are no rights other than the rights of human individuals, and economic and social behaviour is assessed in terms of whether or not it respects those rights.
Utilitarianism has a focus on individual utility, welfare, and happiness. Actions which increase welfare are right and actions that decrease it are wrong.
What is a social welfare function?
Social welfare is a function of individual utilities
The higher the better (rational), allocation and redistribution optimization, and intertemporal welfare (discount of future utility)
When is utility maximised?
For consumption of multiple goods, utility is maximized when the marginal utility (MU) per unit of cost (price) is the same across all goods:
In graphical terms, utility is maximized where the highest possible indifference curve (representing levels of utility) is tangent to the budget line (representing the constraint).
Assess the importance of interdependent utility
«No man is an island»
· Altruism, envy, and jealousy etc. are also part of individual
well-being
· Importance of peer groups (with increasing social integration,
globalization, new communication technologies)
· Status-seeking behavior and “conspicuous” consumption
· Habit persistence: reluctance of individuals to change their habits
Explain the role of fairness in economics and the conclusions for policy
Public policies are evaluated on the basis of whether their intended outcomes are efficient and fair, and whether they can be implemented.
Fairness (Rawls): A fair distribution is reached by a consensus of free, rational and independent individuals
Pareto-optimum Efficiency: optimal pricing, allocation of economic costs
Unequal distribution is not in every case “unfair” - maximization of welfare but conclusion is narrow
Explain why discounting of the future can be a problem in an intergenerational context.
With discounting, the future utility ‘counts for less’ than the same quantity of present utility.
With rising discount rates, the future becomes less and less important.
Incorrect discount rates lead to unfair distribution of resources, favouring the current generation.
When is a policy Pareto-improving?
In a Pareto-optimal state, no individual can be made better off without another individual being made worse off
A policy is Pareto-improving if it increases the utility of one individual without worsening the situation for the other
Graphically, when is a policy Pareto-improving?
The move from R to Z would be a Pareto improvement. So would be a move from R to T, or to S, or to any point along the frontier between T and S.
Know the concept of utilitarianism
Utilitarianism has a focus on individual utility, welfare, and happiness. Actions which increase welfare are right and actions that decrease it are wrong.
Is it possible to reduce fossil fuel emissions by 50% when in the same time period income is rising by 50%?
Fossil fuel use depends on income and on fuel prices. Use the relationship Q = 𝑌^𝑏𝑃^𝑐 where Q is use of fossil fuel, Y is income and P fuel price. Elasticies b=1 abd c=-1.
▪ Substituting for b and c, we get Q=Y/P
▪ We know that Y is rising by 50% and becomes 1.5Y
▪ At the same time, Q should fall by 50% and become 0.5Q
▪ The new relationship reads 0.5Q = 1.5Y/xP
▪ This holds only for x=3, that is, a 200% increase in price
Define Market failures
What do markets not consider?
What are possible reasons?
▪ Policy and policy failures
- Imperfection of the political process
- Self-serving orientation of agents (government, bureaucracy, lobby organizations)
▪ “Voluntary” (private) action
- Unequal participation, weak effects in general
- Not really voluntary when undertaken to avoid public intervention
- Often needed in an international context (e.g. climate policy)
- What should be a proper behavior, a “good life”? A liberal attitude suggests not judging individual (others’) behavior by strict ecological standards
