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2. WHAT BASIC VALUE SYSTEMS & ECONOMIC THEORY FORM THE FOUNDATION TO STUDY NATURAL RESOURCE ISSUES? SPRING 2002 Larry D. Sanders Dept. of Ag Economics Oklahoma State University 1 INTRODUCTION Purpose: to understand the ethical & economic foundations of natural resource issues Learning Objectives: 1. Explain the fundamentals of ethics & relation to environmental/natural resource issues. 2. Provide a summary review of economic theory basics. References (in addition to Hackett text) – Hite, J.C., & W. D. Mulkey. Natural Resource Economics : An Introductory Textbook, draft unpublished text. – The Internet Encyclopedia of Philosophy (www.utm.edu/research/iep/e/environm.htm) – Rolston, H. Environmental Ethics, Temple University Press, 1988. 2 Whether or not we are aware of it or can express it, “ethics” seem to matter. . . . “That there ought to be some ethic concerning the environment can be doubted only by those who believe in no ethics at all. For humans are evidently helped or hurt by the condition of their environment.” --Holmes Rolston, 1988 3 Some “environmentally ethical” claims... 1.As long as more people are better off, development should proceed. 2.Humans should be responsible for the welfare of animals. 3.Animals have a right to a quality of life and protection. 4.Land owners should be free to do what they want on or with the land. 5.The world was made for man and man was made to rule & conquer earth. 4 Ethics: Some Fundamentals Ethics--branch of philosophy concerned w/moral duty & ideal human character Intrinsic rightness (Deontological Ethics) – – – – what’s desirable (hypothetical imperative) what’s necessary (categorical imperative) Rawls “Justice” (fairness concept) Leopold & “Deep Ecology” Instrumental value (Teleological Ethics) – end justifies means if desirable consequences result (consequentialism) – Natural Law & Utilitarianism 5 Ethics: Some Fundamentals (cont) Logical fallacy to believe that sciences of “what is” can be applied to “what ought” Environmental Ethics--examines the moral basis of environmental responsibility; 3 competing theories 1. Anthropocentrism 2. Species rights 3. Ecocentrism 6 Utilitarian Principles & Economics Benefit Cost Analysis – preferred policy or choice: B > C & Net Benefits are greatest Pareto Efficiency Criterion – policy can’t reduce the welfare of others Pareto Superior – winners must compensate losers Kaldor-Hicks Criterion – winners must have potential to compensate losers 7 Alternative Methods of Economics relate to inclusion of ethics Positive Economics – evaluates “what is” (the observable) » the scientific method – objectivity is key Normative Economics – determines/suggests “what ought” to be done » based on the norms/standards of society/culture – biased is assumed/explained in the process 8 The Key Fundamental Questions of Economics 1.“What” goods/services are produced? 2.“How” are goods/services produced? 3.“Who” gets benefits & costs? NOTE: Often not discussed are related & important ethical questions such as: --Who decides? --Who/what/how to represent the voices of those who don’t have a voice? --What’s fair & to whom? 9 Market Allocation Pure/perfect markets don’t exist Market capitalism--independently-functioning institution to allocate scarce resources/goods/services w/capital privatelyowned & individuals driving the system motivated by self-interest – centuries old & evolving – “golen age” during Industrial Revolution in 19th century – the ethical dimension has driven evolution 10 Market Allocation (cont.) Flow of spending & markets & efficiency Supply & Demand & market equilibrium Consumer Surplus--when willingness-to-pay is greater than price paid Producer Surplus--when price received is greater than willingness-to-sell Market failure--when any of conditions required for well-functioning competitive market not met 11 The Flow of Spending in the Economy PAYMENTS FOR GOODS/SERVICES GOVERNMENT TRANSFER/FACTOR PAYMENTS TAXES TAXES RENT, WAGES, INTEREST LAND, LABOR, FINANCIAL CAPITAL BUSINESSES HOUSEHOLDS GOODS & SERVICES MONEY PAYMENTS FOR GOODS & SERVICES SAVINGS SAVINGS FINANCIAL MARKETS LOANS LOANS 12 Efficiency of Market System Market efficiency: Qd = Qs MB = MC Net Benefits maximized for private market Social Benefits maximized if MBp = MBs = MCp = MCs 13 Market Equilibrium S=MCp=MWTSp Price P1 D=MBp=MVp=MWTPp Quantity Q1 14 Market Failure--Costs Price S’=MCs S=MCp P2 D=MBp=MVp=MWTPp=MBs Quantity P1 Q2 Q1 15 Market Failure--Benefits S=MCp=MCs Price P2 D’=MBs P1 D=MBp Quantity Q1 16 Market Failure Inefficient allocation of resources MBp = MCp MBs = MCs Sources – – – – Imperfect Competition (market power) Imperfect Information Public Goods--property rights not assigned Externalities--costs/benefits that don’t accrue to economic unit that creates them 17 Market Efficiency Issues Equity – Efficiency may not be Equitable » Distribution may be a problem » “Best” is determined by Society Dynamic Efficiency – Static: 1 time period or multiple time periods independent of each other – Dynamic: Multiple time periods, dependent on each other [Pt+1 = f (x,y, Pt, z)] 18