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University of Waterloo
PHIL 224
Heather Douglas

PHIL 224 week three Freeman’s The Ethical Basis of the Economic View of the Environment summary • When economists recommend environmental policies, there are always great distrust towards them (eg. Economists: place a tax on emissions of pollutants; environmentalists: this would create ”licenses to pollute“) • The economic problem of the environment is a small part of the overall economic problem: how to manage our activities so as to meet our material needs and wants in the face of scarcity • Assume that everyone can identify their likes and dislikes and the intensity of their preferences. Furthermore, these preferences are not lexicographic and there is no limit on wants. Example: bag A: 2 apples and 2 oranges = bag B: 1 apple and 3 oranges. Individuals can be compensated for the loss of some quantity of one good by increases in quantities of one or more of the other goods • The basis of the economic theory of value: in a market economy where all goods and services can be bought and sold at given prices in markets, the necessary amount of substitution can be expressed in money terms • If the substitution principle applies to good things that are derived from a clean environment, then it is possible to put a price on those things. Are some environmental benefits lexicographic? • Pareto Optimality: an economy that has reached a state of economic efficiency if it is not possible to rearrange production and consumption activity so as to make at least one person better off except by making one or more other individuals worse off • Economic efficiency: all goods that matter to individuals can be bought and sold in markets and all such markets must be competitive (many buyers and sellers so no one can influence the price) -> laissez-faire capitalism (almost government-free economy) • Pareto Criterion: accept only policies that benefit some people while harming no one. That is not practical and unless people have lexicographic preferences, the substitute principle applies • Potential compensation criterion (utilitarianism): gainers compensate losers with money so everyone gains -> basis of cost-benefit analysis of public policy • Benefits are the money values of the gains to individuals and costs are the money values of the losses to individuals. If benefits exceed cost, gainers could compensate losers • Issues with the potential compensation criterion: should compensation always or never be paid? If not, then who deserves to be compensated? Willingness to pay is constrained by ability to pay (ie. The payer’s income level) • Unlike other resources such as land, labour, capital and entrepreneurship, the market does not distribute the environment to its highest valued uses because individuals do have effective property rights in units of the environment • Ex. Voluntary exchange of labour for money: I work at Payless for $10.25/hour. What if a firm wishes to dump toxic waste into lakes, it is under no obligation to determine whose health or view might be impaired by this use of the environment or to obtain their voluntary agreement through the payment of money -> not Pareto Optimality • Each unit of pollution discharged imposes costs or damages on other individuals but dischargers are not required to compensate the losers for these costs • If the government put a tax on per unit of pollution and set the tax equal to the money value of the damage that pollution cause to others, then pollution dischargers would compare the tax cost of discharging pollution with the cost of controlling that discharge and as long as the cost of control were less than the tax of discharge, the firm would prevent discharge. The government could use the tax paid to compensate those who are damaged by the pollution • The “value” of saving a life can be calculated from information on individuals’ trade-offs between risk and money • Ex. 1000 people each with a chance of 0.004 of dying in the next year. Suppose an environmental change would reduce that chance to 0.003 (a difference of 0.001) and each person is willing to pay $100 to implement that change. The group paid $100,000 and there is a chance that one less person will die in the next year (0.001 x 1000) so the value of one life in this example is $100,000. • We could reduce the risk to 0 but people are not willing to pay that high so there is always a risk for somebody out there • Social rate of discount is used to weight benefits and costs occurring at different points in time • There are debates about the appropriateness of applying a discount rate to effects on future generations Ex. We did something that yield the benefit of X today. This set in motion some process that will cause F damages in N years P: the present/discount value of the payment F: the payment that will be made N years in the future R: discount rate (7 to 8% usually) N: number of years • Main argument against discounting: at any reasonable (not 0) discount rate, the present value of damages will be trivial and almost certainly will be outweighed by present benefits • The implication of discounting is that we do not care about the damages we inflict on future generations provided that they are postponed sufficiently far into the future Anthropocentric Environmental Ethics (it is all about humans, we are the only thing that matters) • The environment is a scarce resource: unclear as to if we can get everything we want out of the environment • Each person is the best judge of his or her preferences: each person knows best what they want and economists will not tell you what you should want • Wants are substitutable (no lexicographic preferences: things one will not trade for anything else (ex. Your own life) • Anything you desire you could always have an alternative package put on the table (an exchange) • Ex. would putting garbage in the Grand Canyon be worth it or is it something that people aren’t willing to give up? There are something people wouldn’t give up • Nothing is priceless • Unit of exchange: money • Unlimited wants: there are no limits to our wants; we are never totally satisfied with what we have • If your life is improving then you are happier; if it feels like your life is getting worst you’re not as happy • We want our lives to be continually getting better • Goal: either maximum satisfaction of wants or maximum satisfaction while respecting autonomous choice Economic Efficiency p.39 Poreto Optimal State: a state such that no one can gain without someone else losing (ex. All voluntary trades have been made); regulations to correct markets but unrealistic and immortal (ex. One person owns everything) • There are infinite numbers of ways but what’s the most efficient way? • No coercion, all trades are made • Market failures: monopolies, poor information flow, irrational human beings • Achieving utilitarianism goal by any means Utilitarian goal: to achieve the greatest good for the greatest number; maximum satisfaction of wants desires and preferences? • Potential compensate • Coercion is okay • No higher or lower pleasures Assigning Values Actual markets Expert evaluation • market failures • willingness to pay (WTP) • initial distribution • money utility • Pareto optimality • trust studies General concerns with economics and the environment • Not everything is traded on the market • Ex. Murder cannot be legally traded, cannot buy yourself out of jail • Are there aspects of the environment we should be taking off the market or should it be part of a market analysis? • Percept positions are true? Should it all be on the market? • Which goal is correct? What goal should we focus on? • Do humans have lexicographic preferences? Economic Approach (are you only a consumer?) Sagoff consumers versus citizens • Vote for stricture standards for pesticides • We are not just economic creatures (consumers) • We are also political creatures (citizens) • How do we decide things politically? • Vote, educate yourself with what’s going on through debates, have debates and discussion and vote in a way that shows your informed opinion, debate brings in a much richer set of criteria of what the environmental standards should be • Do we have lexicographic preferences when it comes to the environment? • Economic approach is private and no one tells you what your preferences should be
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