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And God said, Let us make man in our image, after our likeness: and let them have
dominion over the fish of the sea, and over the fowl of the air, and over the cattle, and
over all the earth, and over every creeping thing that creepeth upon the earth. Verse 26,
Book of Genesis, The Bible, King James Translation.
Some claim ‘dominion over’ would be better translated as ‘stewardship of’
Why consider ethics?
The question ‘What will happen to petrol consumption if the tax on it is increased by
x%?’ is a question for positive economics. It does not entail any ethical considerations.
The question ‘Should the tax on petrol be increased?’ is a question for normative, or
welfare, economics. It can only be answered using ethical criteria.
Much of environmental and resource economics is about questions of the ‘should’ type –
questions about the targets and instruments of policy.
The ethical criteria that welfare economics uses are Utilitarian. To understand the basis
for the welfare economics that environmental and resource economics draws on, it is
necessary to consider the Utilitarian ethical system that underlies welfare economics.
There are other ethical systems.
Naturalist moral philosophies
For an individual a utility function maps states of the world into a single number for
utility
U = U(X1, X2,....Xi,...XN)
Aggregation over individuals requires that U’s are cardinal numbers (weight, height,
distance). The standard operations of arithmetic do not apply for ordinal numbers, which
indicate only ranking ( street numbers). Cardinality makes interpersonal comparison
possible.
The standard propositions of demand theory can be derived from ordinal utility
functions, and many economists are reluctant to assume cardinality and admit
interpersonal comparisons.
In which case, policy advice is restricted to the application of compensation tests ( to be
discussed in Chapter 4) which ignore distributional issues. Much of applied welfare
economics, as in environmental economics, does ignore distribution (
fairness/equity/justice) and focus on efficiency via compensation tests.
If cardinality is assumed, aggregation can use a social welfare function.
The social welfare function
Max W = W(UA, UB)
Subject to UA = UA(XA) and UB = UB(XB)
and X = XA + XB
gives the necessary condition
WAUAX = WBUBX
where WA and WB are the derivatives of the social welfare function wrt UA and UB
and UAX and UBX are the derivatives of the utility functions, marginal utilities, so that
the condition is that marginal contributions to social welfare from each individual’s
consumption are equal.
For W = wAUA(XA) + wBUB(XB)
where wA and wB are fixed weights the condition is
wAUAX = wBUBX
and for wA = wB = 1 so that the fixed weights are equal
UAX = UBX
In this case, if the individuals have the same utility functions, social welfare
maximisation implies equal consumption levels.
Social welfare maximisation – a special case
Figure 3.1 shows one indifference curve, drawn in utility space, for W = UA + UB. Figure
3.2 is drawn in consumption space, where, assuming diminishing marginal utility, the
welfare indifference curves are convex from below. Maximisation of welfare subject to
the constraint of a fixed amount available gives equal consumption for the two
individuals.
This is a special case.
Social welfare maximisation with different utility functions
Equal consumption levels for welfare maximisation is not the general case. It is not the
result if
1.the SWF is linear with unequal weights and the U functions are the same
or
2. the SWF is linear with equal weights and the U functions differ
Then, a rise in 1’s income means increased consumption of 1, which is, say, clothes – higher E11 for
given A11 and EO1 means higher U1 initially. But she gets used to her new clothes and A11 adjusts to
past E11, reducing U1. The novelty wears off - adaptation.
In a growing economy, the consumption of others is rising along with that of 1, working to restore the
gap between E11 and E01, and to reduce U1 back toward its former level. This is interdependence as
rivalry.
Adaptation and rivalry are everyday experience, but not much taken account of in economics to date,
where the standard utility function is:
U1t = U1(E11t,E12t,....E1jt,....E1mt)
Implications
The results of ‘happiness research’ clearly have implications for both positive and
normative, ie welfare, economics, and hence for environmental and resource economics.
Welfare economics recognises interpersonal interdependencies, as person to person
externalities (chapter 4), but relates them to material interdependencies, and treats them as
exceptional.
Results from happiness research suggest that interpersonal interdependencies can be purely
psychological, and are not in the least exceptional.
Layard (2005a and 2005b) considers the implications for thinking about income taxation.
According to standard public economics, income taxation is regrettable necessity (because
lump sum taxation is not feasible) which distorts the choice between consumption and
leisure. It should be kept as low as possible.
Layard points out that this result depends on the assumption that there are no externalities
involved in the work (to consume)/leisure choice, whereas happiness research shows that
there are. Each individual’s choice is affected by that of others. Given that, income taxation
can be seen as an externality correcting policy, rather than a distortion, akin to a tax on
pollution.
What the results of happiness research imply for the policy prescriptions of environmental
and resource economics has yet to be worked out.
Criticism of preference based utilitarianism
The kind of utilitarianism that welfare economics is based on has it that individuals are
the best judge of what is good/bad for them, so that individuals’ preferences tell the
analyst what is good for individuals.
Two lines of criticism of this particular version of utilitarianism can be distinguished:
1.Taking preferences as given and truly reflecting interests, is it reasonable to assume
that individuals generally have enough information to assess the implications for their
utility of the alternatives open to them?
2. Is it reasonable to assume that, in a world where socialisation processes and
advertising are pervasive, peoples’ preferences do truly reflect their interests?
Sen (1987) has argued that people are dualistic, being concerned with the satisfaction of
their own preferences and pursuing objectives which are not exclusively self-interested.
Sen distinguishes between altruism as ‘sympathy’ and ‘commitment’. Sympathy is where
my concern is reflected in arguments in my utility function, so that if a change improves
the lot of relevant other(s), my utility increases. Commitment is where my concern is
based on my ethical principles, which may lead me to approve of change that reduces my
utility. Individuals exist as both consumers and citizens.
Rawls: A Theory of Justice
Rawls objects to classical utilitarianism on the grounds that simply maximising
the sum of individual utilities, and ignoring their distribution, could lead to
outcomes that violate fundamental rights.
Rawls looks to establish the principles of a just society by asking what would be
agreed by everyone if we could freely, rationally and impartially consider just
arrangements. To do this, he uses the ‘original position’, in which individuals exist
behind a ‘veil of ignorance’ – no person has knowledge of what their circumstances
would be in the world for which they are deliberating the nature of a ‘social
contract’.
Rawls claims that there would be unanimous agreement on two fundamental
principles of justice
Each person to have a right to the most extensive liberty compatible with
the same for others
Social and economic inequalities to be arranged so that they are (a)
expected to be to everyone’s advantage and (b) attached to positions and
offices open to all
The second of these is the Difference Principle. It asserts that inequalities are
justified only if they enhance everyone’s position – if they lead to Pareto
improvements. There is a presumption in favour of equality.
Rawlsian utilitarianism 1
One way to give utilitarianism a Rawlsian
character is to use a particular form of
Social Welfare Function, which for two
individuals would be
W = min(UA, UB) (3.8)
so that W is the smallest of UA and UB.
Raising utility for the worst off will
increase welfare. Re-allocating db from B
to A, de = db, gives e.
The 45o line, UA = UB, gives maximum
levels of welfare.
Rawlsian utilitarianism 2(a)
Iso-elastic Utility Functions
1 η
X
U for η 0 and η 1 (3.9)
1 η
U = lnX for η = 1 (3.10)
η is the elasticity of marginal utility with respect to consumption X
W
X A 1 η
X B 1 η
(3.11)
1 η 1 η
W = lnXA + lnXB (3.12)
Rawlsian utilitarianism 2(b)
For η = 0, the SWF on iso-elastic U functions treats an extra unit of consumption
equally across individuals
For η = ,1 it treats equal proportional increases in consumption equally across
individuals
For η > 1, it treats an x% increase for the poorer person as more welfare
increasing than x% for the better-off person.
As η goes to infinity, so small U increases for the worst-off get weighted much
more than large U increases for the better-off. In the limit, increases in U for the
better-off have no effect on welfare.
Rawlsian utilitarianism 2(c)
Table 3.2 Welfare weights for consumption increases
0 1 1 1 1
t =T t =T
(3.15)
1
= t Ut
t Ut
t = 0 (1 + ρ ) t =0
where
t (1 ρ) t
For an infinite time horizon
t = t =
1
W= t Ut
t Ut
t =0 (1+ ρ ) t =0 (3.16)
In continuous time
t = t
U dt
ρt
W= Ut e dt = t t (3.17)
t =0 t 0
where
t e ρt
Exponential discounting
Maximise
t
K Q(K t ) C t
t 0
Subject to
K Q(K t ) C t (3.19)
Optimal growth: a condition and its implications
U
ρQ
C
K
(3.20)
U C
Initially, QK is large and the rhs negative, which, given diminishing marginal
utility has the lhs giving consumption increasing
The capital stock grows and QK declines. For QK = ρ the lhs goes to zero and
consumption growth ceases.
Those alive early save for those alive later, who will be richer.
For ρ = 0, savings at every point in time would be higher, and capital
accumulation would continue until QK went to zero.
For high ρ, early people would do less saving and accumulation and society
remain poor despite the capacity to become rich
Optimal growth with non-renewable resource input
Maximise
W U(C )e dt
t ρt
(3.21)
t 0 t
Subject to
Q(K , R ) C
K (3.22a)
t t t
S R (3.22b)
t
S R dt
t
(3.22c)
t 0 t
The implications of an ethical position – ρ > 0 - vary with
circumstances
Q αK βR
t t t
Q K R
t
α
t
β
t
with α β 1
Qt = min(αKt, βRt)
NO, non-substitutability (Leontief)
Sustainability – optimal?
For the, Cobb Douglas, case where constant consumption utility is feasible with
a non-renewable resource used in production, following the Hartwick Rule gives
constant consumption/utility.
The rule, a constraint, is that all of the rent arising from the extraction of the
resource along an intertemporally efficient depletion programme must be saved
and invested in the stock of reproducible capital, K.
In that case, the total value of the economy’s capital stock – K plus S – remains
constant over time.