2.0 Introduction

After reading the brief introduction to global warming, you are now more informed about the issue compared to 95 percent of the U.S. population. Suppose that there was a presidential election tomorrow, and candidate A was supporting an efficiency standard. Based on the current benefit–cost analyses of reducing greenhouse gas emissions, she was advocating a moderate carbon tax. Candidate B, by contrast, believed in an ecological sustainability standard and was pushing a much higher tax, combined with aggressive government action to promote clean technology. If you were a single-issue voter, for whom would you vote? Why?

If you voted for candidate A, you might have done so out of a concern for economic growth or jobs. You might even have reasoned that the economic slowdown brought on by increased regulation would actually penalize the future generations more than the warming by reducing investment in education, capital, and new technology. If, on the other hand, you voted for candidate B, perhaps you did so because you thought that it was unfair to punish our descendants for our wasteful consumption habits and that passing on a stable climate to them was more important than providing them with a new, improved form of breakfast cereal. You might have also thought that we have a moral duty to preserve the species of the earth. Finally, you might have reasoned that new jobs would be created in the process of controlling carbon emissions.

The question “How much pollution is too much?” is what economists call a normative issue—it focuses our attention on what should be, rather than what is. Some are tempted to dismiss normative or ethical questions by saying, “It’s just a matter of opinion.” But, in fact, in our society, opinion matters. The underlying ethical viewpoints held by lawmakers, regulatory and industry officials, and voters fundamentally influence the making of pollution policy. Similarly to most countries, the United States already has a system of laws and regulatory agencies responsible for controlling the amount of pollutants emitted by factories, offices, farms, cars, and, in the case of cigarettes, even people’s lungs. Are the current laws too strict (as many in industry maintain), or do they need to be tightened up (as environmentalists argue)? Examining the ethical foundations of our own opinions will help us evaluate what is the “right” amount of pollution these laws ought to permit. Without a well-reasoned answer to this question, sensible environmental regulation becomes impossible.

In the first part of this book, we examine three different pollution standards: an efficiency standard, which carefully weighs the benefits and costs; a safety standard, which emphasizes human health; and an ecological sustainability standard, which argues for the preservation of current ecosystems. Along the way, we explore the complex issues involved in measuring the costs and benefits of cleaning up our environment. Wrestling with this material probably will not change where you stand on the “growth versus environment” debate, but it should help you clarify why you think the way you do. This in turn will make you a more effective advocate of your position. And convincing others that your opinion is “better”—either more logical or more consistent with widely held social norms—is the basis for taking action to make our world a better place.

2.1 Utility and Utilitarianism

Economic analysts are concerned with human welfare or well-being. From an economic perspective, the environment should be protected for the material benefit of humanity and not for strictly moral or ethical reasons. To an economist, saving the blue whale from extinction is valuable only insofar as doing so yields happiness (or prevents tragedy) for the present or future generations of people. The existence of the whale independent of people is of no importance. This underlying human-centered (or anthropocentric) moral foundation of economic analysis is known as utilitarianism.

There are, of course, different perspectives. One such alternative is a biocentric view. Biocentrism argues that independent of the utility of doing so, people have a moral responsibility to treat the earth with respect. From the Native Americans to Henry David Thoreau and John Muir to Earth First! activism, this is an old and familiar idea in American culture. (Of course, a celebration of the unbridled exploitation of nature has also played a dominant role in American intellectual history.)¹ Aldo Leopold, considered by many to be one of the most influential environmental thinkers of the last century, stated it this way: “We abuse land because we regard it as a commodity belonging to us. When we see land as a community to which we belong, we may begin to use it with love and respect.”²

As this quote suggests, many environmentalists are hostile to utilitarian arguments for protecting the environment. Indeed, an economic perspective on nature is often viewed as the primary problem, rather than part of the solution. The philosopher Mark Sagoff puts it this way:

The destruction of biodiversity is the crime for which future generations are the least likely to forgive us. The crime would be as great or even greater if a computer could design or store all the genetic data we might ever use or need from the destroyed species. The reasons to protect nature are moral, religious and cultural far more often than they are economic.³

The focus on anthropocentric, utilitarian arguments in this book is not meant to discount the importance of other ethical views. Indeed, in the long run, nonutilitarian moral considerations will largely determine the condition of the planet that we pass on to our children and theirs. But, economic arguments invariably crop up in short-run debates over environmental protection, and they often play pivotal roles.

Individual economists may, in fact, accept biocentrism as part of their personal moral code. However, in conducting their analysis, economists adopt a hands-off view toward the morality or immorality of eliminating species (or of pollution in general), because they are reluctant to impose a single set of values on the broader society. However, failing to make a judgment itself implies an ethical framework—and the moral philosophy underlying economics is utilitarianism.

Utilitarians have two difficult questions to settle before they can apply their analysis to issues such as pollution. The first is, “What in fact makes people happy?” This is a difficult question; the great religions of the world, for example, each offer their own spiritual answers. Economists respond at the material level by assuming that the consumption of goods brings happiness or gains utility. Goods are very broadly defined to include any and all things that people desire. These include both market goods, such as tomatoes, smartphones, and basketball shoes, and nonmarket goods, such as clean air, charitable deeds, or the view from a mountaintop. What makes something a good is a personal matter. Leon Walras, an economist who lived in the 1800s, puts it in this rather provocative way:

We need not concern ourselves with the morality or immorality of any desire which a useful thing answers or serves to satisfy. From other points of view the question of whether a drug is wanted by a doctor to cure a patient, or a murderer to kill his family is a very serious matter, but from our point of view, it is totally irrelevant.⁴

One can express the positive relationship between consumption of goods and utility in a mathematical relationship known as a utility function. We can write a utility function for a person named Aldo on a given day as

where the ellipsis indicates all the other items Aldo consumes over the course of the day and the plus signs indicate that Aldo’s utility rises as he consumes these goods. Another way to present Aldo’s utility function is to compress all the goods he consumes into a consumption bundle, labeled $X_A$ (the $A$ is for Aldo), and write ${\text{Utility}}_A=U_A\left(X_A\right)$.

Now, the production of many of the market goods in his consumption bundle, $X_A$, also creates pollution, which Aldo doesn’t like. So, let us break out one element from Aldo’s consumption bundle, $P_A$, the pollution to which Aldo is exposed. We can now write Aldo’s utility function as ${\text{Utility}}_A=U_A\left({\stackrel{+}{X}}_A,{\stackrel{-}{P}}_A\right)$, where the minus sign above the pollution variable reminds us that Aldo’s utility declines as his exposure to pollution increases.

This utility function illustrates a key assumption underlying most economic approaches to environmental issues: A fundamental trade-off for human happiness exists between increased material consumption (economic growth) and environmental quality. Whenever $P_A$ goes down (the environment is cleaned up), $X_A$ goes down too (other consumption falls), and vice versa. Put another way, the opportunity cost of environmental cleanup is assumed to be slower growth in the output of market goods.

One additional assumption about this utility–consumption relationship is often made: More is better. That is, Aldo is always happier when given more stuff. This may seem implausible. Why should Aldo want more than one ice cream cone if he is already full? The standard reply is, he can give it to a friend (which would make Aldo happy) or sell it and use the money to buy something he wants.

As we shall see, the “more is better” assumption is a crucial one. On the one hand, it provides substantial power to the proponents of the efficiency standard. On the other hand, the proponents of a safety standard argue that it incorrectly builds in a “bias” toward economic growth. Ignoring the additional pollution it creates, under the more-is-better assumption, growth by definition increases human happiness. We devote Chapter 11 of this book to a careful examination of this assumption. To the extent that more is not better, utilitarian arguments for protecting the environment at the expense of consumption growth become much stronger.

To summarize this section, in answer to the first question of what makes people happy, utilitarians argue that it is consumption of market and nonmarket goods. The happiness trade-off between consumption and environmental quality can be conveniently expressed in the form of a utility function. A second and more controversial assumption often made is that, from the individual perspective, more of any such good always increases happiness. With this answer in hand, we can now move on to the second question facing utilitarians: How does one add up individual happiness to social happiness?

2.2 Social Welfare

If increases in consumption of both market and nonmarket goods make individuals happy, does this also mean that increases in individual consumption improve the overall welfare of a society? Answering this question involves incorporating issues of fairness and rights. How does one weigh a decrease in the happiness of one individual against an increase in the happiness of another? To make their assumptions about fairness explicit, economists often specify a social welfare function, which determines a “desirable” way of adding up individual utilities. In a society including Rachel ($R$), John ($J$), and many others (…), we can write:

where, again, the plus signs indicate that social welfare rises as each individual gets happier.

One commonly used social welfare function is just the sum of individual utilities:

The original 19th-century utilitarians believed this to be the correct form, arguing that the “greatest good for the greatest number” should be the guiding principle for public policy. They thought that to implement such a policy would require measuring utility in a precise way, and they devised elaborate methods for comparing the relative happiness derived from consumption by different individuals.

Unlike classical utilitarians, modern economists do not rely on direct measurements of utility. However, to determine the “correct” level of pollution from a social welfare perspective, we do need to weigh one person’s consumption against another’s. One social judgment we might make is that additions to consumption are equally valued by individuals. This is called an assumption of equal marginal utility of consumption, and it allows us to directly weigh the impact of welfare on changes in the patterns of consumption. For example, under this assumption, if your income goes up by a dollar and mine goes down by a dollar, social welfare will remain unchanged.⁵

Given this assumption and the specification of the social welfare function in equation (1), increases in each person’s happiness receive equal weight—social welfare improves at the same rate when the utility of either a millionaire (John) or a street person (Rachel) rises. In fact, social welfare could potentially rise as millionaire John was made better off at street person Rachel’s expense! When utility is simply added up, no allowance is made in the social welfare function for issues of fairness in the distribution of income among those alive today.

The social welfare function represented by equation (1) also provides no special protection for the well-being of future generations; under the simple adding-up specification, social welfare might rise if the current generation went on a consumption binge at the expense of our descendants. This would be true, provided that the increase in consumption today more than offsets the decrease in consumption tomorrow.

Finally, the social welfare function in equation (1) also assumes that pollution victims have no special rights. If, for example, Rachel lives downwind from John’s steel factory and, as a result, suffers health damages of, let us say, $25 per day, this decline in social welfare would be strictly offset by a gain in John’s profits of $25. Equation (1) is thus “blind” to the distribution of the costs and benefits of economic events within the current generation, across generations, and between pollution victims and beneficiaries. All that matters for boosting social welfare is increasing the net consumption of both market and nonmarket goods, regardless of who wins and who loses.

Equation (1) is, in fact, the “adding-up” mechanism underlying an efficiency standard for pollution control. Under an efficiency standard, the idea is to maximize the net benefits (benefits minus costs) of economic growth, by carefully weighing the benefits (more consumption) against the costs (pollution and resource degradation). This is done without reference to who bears the costs or gains the benefits.

How can such a position be ethically defended? While pollution certainly imposes costs on certain individuals, efficiency advocates maintain that, over time, most people will benefit if the net consumption benefits from pollution control are maximized. Put in simple terms, lower prices of consumer goods for the vast majority (including necessities such as food and energy) must be strictly balanced against protection of environmental quality and health.

The “blind” approach that efficiency supporters take toward the distribution of costs and benefits provides one extreme. By contrast, if Rachel is impoverished, we might assume that her marginal utility of income is greater than that of John; one dollar increases Rachel’s happiness more than it increases John’s. Then, in the interests of social well-being, we might as well want to weigh the increases in Rachel’s consumption more heavily than those of the affluent.⁶

In practice, the strict efficiency standard for pollution control is often modified to include “fairness weights” in the social welfare function. In particular, as we discuss further in Chapters 8 and 9, a concern for fairness to future generations is often incorporated. For example, we might wish to employ a sustainability rule that says that social welfare does not rise if increases in consumption today come at the expense of the welfare of our children. Suppose that Rachel (now an “average” person) is not yet born, while John (also an “average” person) is alive today, then our sustainable social welfare function would be written as

where $w$ is a weighting number big enough to ensure that increases in John’s consumption do not substantially penalize Rachel. Here, and unlike in equation (1), increases in happiness for the average individual today cannot come at the expense of future generations.

Finally, we bring Rachel back to the present, living downwind from John’s steel factory. She is now exposed to air pollution, $P_R$. She consumes this pollution, but recall that it is an economic “bad” and so enters her utility function with a negative sign. Proponents of a safety standard will argue that in the interests of personal liberty, Rachel has a right to protection from unsolicited damage to her health. As a result, they will weight the negative effect of pollution in her utility function more heavily⁷:

Now, there is substantially less improvement in social welfare with the production of steel than with less-polluting commodities. An extreme safety advocate, by choosing such a large value for the weighting number $w$, would essentially refuse to balance the benefits of the polluting steel process (cheaper steel and all the products that steel contains) against the harmful impact of pollution.

The latter two specifications of the social welfare function—sustainability and safety—imply that a happy society is more than just the sum of its parts. Fairness criteria based on income distribution (both within and between generations) and personal liberty must be met as well. When the more-is-better assumption is relaxed in Chapter 11 of the book, we add yet another layer of complexity: because my happiness from consumption depends on your level of consumption in a variety of ways, happiness will depend on relative rather than absolute levels of material welfare. As a result, in order to correctly specify social welfare, certain “noncompetitive” consumption items such as environmental health will also be weighted in the social welfare function.

This section has illustrated three different forms for a social welfare function—efficiency, sustainability, and safety—each specifying how individual utility might be added up to equal social well-being. While these different social welfare functions may seem arbitrary, proponents of each will argue that, in fact, their vision reflects the “dominant viewpoint” in our society about the proper relationship between material consumption and social welfare.⁸ Social welfare functions have the advantage of forcing the advocates of utilitarian policies to precisely state and defend both their basic assumptions and the logic by which they reach their conclusions. As we proceed in this first part of the book, we shall see that the different pollution standards are ethically defended by making different assumptions about the proper form of both the utility and social welfare functions.

2.3 Summary

This chapter has provided an introductory discussion of the ethical foundations of economics. Economists maintain as a basic assumption that increases in material consumption of both market and nonmarket goods—including clean air and water—increase individual utility. Whether growth in material consumption, independent of fairness and rights, necessarily leads to an overall increase in social welfare depends on the form that is specified for the social welfare function. There is no “correct” social welfare function. But, economists use social welfare functions to help clarify normative debates, including the one that concerns us: How much pollution is too much?

Three positions are often staked out in economic discussions regarding environmental protection. First, there are those who argue for a careful weighing of costs and benefits that pays no attention to the distribution of those costs and benefits. This is an efficiency position. Second, there are safety standard supporters, who maintain that people have a right to have their health protected from environmental damage, regardless of the cost.

The third position is sustainability, which argues for protecting the welfare of future generations. While the sustainability criterion is easy to state, we will find that there is much debate about what sustainability means in practice. This is because future generations are affected by our current decisions in complex ways. For example, will our grandchildren be better off if we leave them oil in the ground or if we exploit the oil deposits and invest the profits in developing new forms of energy? The answer to this question is not obvious.

Insofar as the debate about resources and the environment focuses on the welfare of people, it remains a utilitarian one and in the realm of economics. Again, this is not to downplay the importance of noneconomic ethical views about the environment. However, the economic approach asks us to think clearly about the ways in which nature serves our social needs. By examining the ethical foundations of different views on the appropriate level of pollution, we can develop a better notion of why do we support either a modest or an aggressive position on slowing global warming.

1. 2.0 Normative questions ask what should be rather than what is. Economic analysis of normative issues proceeds by clearly stating the underlying ethical assumptions.
2. 2.1 The ethical foundation of economics is utilitarianism, a philosophy in which environmental cleanup is important solely for the happiness (utility) that it brings to people alive today and in the future. This philosophy is contrasted with a biocentric view, which values nature for its own sake. Economists assume that consumption of both market goods and nonmarket goods makes people happy. This relationship can be expressed in a utility function, in which pollution enters as a negative consumption element. A utility function assumes a fundamental trade-off between growth in consumption and improvements in environmental quality. Economists often make one further key assumption about the consumption–utility relationship: more is better.
3. 2.2 To add up individual utility, economists use a social welfare function. In such a function, one might assume equal marginal utility of consumption so that social welfare is just the sum of individual happiness, regardless of the distribution of benefits within a generation, across generations, or between victims and polluters. This social welfare function underlies the efficiency standard, which seeks to maximize the net benefits from the steps taken to protect the environment. Alternatively, one might want to weight the consumption of poor people more heavily than that of rich people, of victims more heavily than that of polluters (safety standard), or adopt a sustainability rule ensuring that consumption today does not come at the expense of future generations. No social welfare function is “correct,” but their use helps in clarifying the underlying assumptions in normative debates on the right level of pollution.

REFERENCES

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