Part I

1. How Much Pollution Is Too Much? Part I

2. Ethics and Economics Chapter 2

3. Introduction • Normative vs. Positive • Positive issues focus on what is • Normative issues focus on what should be • The question “How Much Pollution Is Too Much?” is a normative issue • Normative analysis requires clearly stating underlying ethical assumptions

4. Three standards • To answer the question, “How Much Pollution is too Much?” we will examine three different pollution standards: • Efficiency standard • Sustainability standard • Safety standard

5. Utility and Utilitarianism • Utilitarianism argues that environmental cleanup is important solely for the happiness (utility) that it brings to people alive today and in the future • Utilitarianism is the ethical foundation of economics

6. An alternative View: Environmental Ethic=Biocentrism • Independent of the utility of doing so, people have a moral responsibility to treat the earth with respect • Important, but not traditionally the focus of economic analysis

7. What Makes People Happy? • “Goods” include any and all things people desire, including • Market goods (tomatoes, DVDs, basketball shoes) • Nonmarket goods (clean air, charitable deeds, the view from a mountaintop) • The positive relationship between the consumption of goods and utility can be represented in a “utility function”

8. Utility Function • A utility function for a person named Aldo on a given day could be • UtilityAldo = UAldo(# of tomatoes, # of DVDs, # of basketball shoes, lb of clean air, # of charitable deeds, # of mountaintop views) • We can bundle these goods into a consumption bundle (XA) and express Aldo’s utility in this way: • UtilityAldo = UA(XA)

9. Adding Pollution • Producing the goods Aldo consumes causes pollution to which Aldo is exposed (PA) • Aldo’s utility function: UtilityA = UA(XA,PA), where Aldo’s utility declines as PA increases • Illustrates a trade-off between growth in consumption and improvements in environmental quality

10. More is Better • Economists often make the assumption that more is better (i.e. Aldo is always happier with more “goods”) • Is this a reasonable assumption? More on this in Chapter 11….

11. Social Welfare • Do increases in individual consumption increase the overall welfare of a society? • To answer this question and make explicit their assumptions about fairness, economists specify a “social welfare function”

12. Social Welfare Function • In a society including Rachel (R), John (J), and many others (…), we can write SW = ƒ(UR(XR, PR), UJ(XJ, PJ), …) • Where increases in X increase social welfare and increases in P decrease social welfare • Here is an important example: the unweighted sum of individual utilities. SW = UR(XR, PR) + UJ(XJ, PJ) + …

13. 1. The Efficiency Standard • The above is the “adding up” mechanism underlying an efficiency standard for pollution control • Under an efficiency standard, the idea is to maximize the net benefits of economic growth • This is done without reference to who bears the costs or gains the benefits

14. Efficiency: An example • Pesticide use on strawberries causes human sickness that costs members of society $100 million per year. • Pesticide use also lowers strawberry prices to consumers by $150 million per year.

15. More on strawberries • In this case, the Net Benefits of pesticide use (benefits minus costs) are $50 million. • Since the net benefits are positive, banning the pesticide would be inefficient. • (For simplicity, assume no other benefits or costs)

16. Defending the Efficiency Standard • Proponents of an efficiency standard argue that, over time, most people will benefit if the net economic benefits from pollution control are maximized • Lower prices of consumer goods for the majority must be balanced against protection of environmental quality and health

17. Efficiency: Digging Deeper • To determine the “correct” level of pollution from a social standpoint, we need to weigh one person’s consumption against another’s • The assumption of equal marginal utility of consumption says that additions to consumption are valued equally by all individuals • This is implicit behind the efficiency standard

18. Potential Problems with Efficiency • No allowance for issues of fairness in the distribution of income for this generation • No special protection for the well-being of future generations • No unique rights for pollution victims

19. 2. The Sustainability Standard • Designed to protect the welfare of future generations • Social welfare does not rise if increases in consumption today come at the expense of the welfare of our children • To account for this, in our social welfare function, we would use a “fairness weight” to ensure fairness to future generations

20. The Sustainability Social Welfare Function • Suppose Rachel is an “average” person not yet born and that John is an “average” person alive today • Using a sustainability rule, we can write our social welfare function as:

21. The Sustainability Social Welfare Function SW = w * UR(XR, PR) + UJ(XJ, PJ) Where w is a weighting number big enough to insure that increases in John’s consumption do not substantially penalize Rachel Here, increases in individual happiness today cannot come at the expense of future generations

22. 3. The Safety Standard • Proponents of a safety standard argue that people have a right to protection from unsolicited damage to their health • To account for this in our social welfare function, we would use a fairness weight on pollution

23. The Safety Standard Social Welfare Function • Suppose Rachel lives downwind from John’s steel factory and, as a result, is exposed to air pollution, PR • Using a safety standard, we can write our social welfare function as

24. The Safety Standard Social Welfare Function SW = UR(XR, w*PR), + UJ(XJ) + … Here, using a large enough w would essentially refuse to balance the polluting steel process (cheaper steel, and all the products the steel contains) against the harmful impact of pollution

25. Which Standard is Correct? • No social welfare function is “correct;” their use helps clarify underlying assumptions in normative debates over the right level of pollution • By examining the ethical foundations of different views about the appropriate levels of pollution, we can develop a better understanding of why people disagree about environmental protection targets.