Intergenerational Fairness Lecture Notes PDF

1. lecture Introduction intergenerational fairness How are our choices now going to affect future people? Caring about the lives today without affecting the future once (make a balance) -> the utility should remain the same but thats difficult to estimate fairness: allocation of ressources -...

1. lecture Introduction intergenerational fairness How are our choices now going to affect future people? Caring about the lives today without affecting the future once (make a balance) -> the utility should remain the same but thats difficult to estimate fairness: allocation of ressources -> how much do we consume/invest now -> with that its better to estimate the future Its difficult because the future isnt here yet so they cant tell us how many they would be ready to pay for climate compensation ◦huge externality -> they cannot compensate for our actions today Economist arent behaving in such an honest way trying to make the climate better. On the other hand the problem with politicians is that they just choose a side but dont know the scientific theory behind it. We already have powerful tools but we just have to look at how to use them. Discussion precausion principle: the more uncertain we are the more we are worried to make any changes in the future If the possibility is really huge that for example an asteroid hits we should make the best of our lives now and use all the opportunities rather to save the ressources that will be destroyed either way 2. lecture assumption 4 We believe that time is infinite, because we can‘t think of a time when it will be over and it would be strange to make a model which lasts for example for 700 years. Desiderata Consumption streams -> when there is improvement we should go there -> more is better continuity: if you change it now a bit it won‘t change in the future Approaches choosing or ranking ◦problem with choosing: If you choose one, the other will just have the same value (like 0) -> when you rank something there is a range from good to bad ◦advantage of choosing: its simpler -> you choose what is feasible ◦ranking is more complex but gives you more information ◦ranking is more general -> choosing is a special case of ranking ◦utilitarianism is the only theory you can rank ◦ranking doesn‘t depend on things like technology -> they have to fit different situations choice-based and preference-based Social welfare functions higher social welfare is just better for society we need transitivity to be rational Puzzling examples example 1 ◦we consume and what is left over we keep for next generations ◦It is impossible for something to be egalitarian and sufficient -> we cant divide an specific  amount of resources by unlimited generations ◦we need to treat generations differently ◦key aspect: to deal with infinite horizon we are obliged to discount future generations example 2 ◦c3: the consumption of the first generation is removed by using anonimity two times -> we shold be careful about the economic theories we write down ◦solve this issue by giving up something -> transitivity, completeness, continuity, anonymity of efficiency? 3. lecture Discussion social discount rate ◦consumption in the future will be less valuable because people will be richer ◦inequality between the generations -> if the future people are richer their consumption is more valuable than the consumption of now (you prioritize the people who are more valuable) ‣ All the models are assuming an increasing long term rate of the economy of 2%. Thats why they say that the future generation will be richer. ◦the problem of climate change are the externalities (even if we care about our children and a bit about the children of others, it wouldnt be possible to resolve it (climate change is global but the change would only be local)-> public intervention is needed no matter what if the SDR is 10% -> the consumption in one year will be 10% less valuable -> how do we use this number? ◦If the SDR is smaller than we value the next generations more ◦If a project is cheaper than the discount rate we should take it if its higher we shouldnt take it ‣ We should use the SDR for small project, because if we use it for bigger ones its a bigger change 4. lecture Sdr benefit from the future so we can transform it into costs that exists today Discounting most people have the opinion that we shouldnt discount future generations There might be arguments against discounting but we should still do it. Postulate 2: there should be two alternatives so that the social welfare changes -> weak axiom (is weak when it imposes less restrictions on the social welfare) ◦if you change the utility the consumption changes and so does the social welfare Postulate 3: actual consumption stream and the future has a choice -> the situation of the present is not relevant for the future. the choices only matter for the future. On the other side if we change something in the present it should not affect the future. Present is seperated from the future in the analysis and vice versa. Postulate 4: removing or adding a period does not matter 5. lecture Discussion risk vs. uncertainty ◦risk is the fact that we know exactly the probability -> very clear, very narrow ◦with uncertainty we do not know what the probability is -> interval of probabilities some say that there are degrees of uncertainty precautionaly approach: minimalise the worst possible outcome (maxi-minimising)  risk attitudes of people are different utilitarianism ◦maximise the expected utility -> but he doesnt include the fact that there is risk respecting individual preferences of risk is not so easy -> as soon as individuals interact its a problem from the perspective of the society because on average in the end they cant be better off than before -> framework is hard to define social situations with intergenerational settings are different, because we decide the risk for them Risk and justice to avoid risk aversion: ◦we should not drop individual rationality because its strange ◦we should drop one of the other two: literature analyses what would happen if we eliminate one of them 6. lecture Discussion repugnant conclusion and sadistic conclusion -> we don‘t really know which one its going to be there is no solution for the problem When you have an intuition for a decision and there is no right model, than there is a mistake with the models (or theres something missing) there is a process in the world and the models aren‘t capturing it -> the time factor is missing and the fact that parents should have kinds 7. lecture - summary of discounting and inequality Discounting discounting formula: W β Ulct ◦if beta is 1 its always equal to 1 -> constant stream of consumption -> the level of social welfare is infinitely high -> we are already at an infinite level no matter what we do ‣ -> W at steady state is infinite ◦if beta is between 0 and 1 ‣ Nordhaus implies thath 1000$ in 100 years are worth 10$ today (4% discount rate) ‣ Stern implies that 1000$ in 100 years are worth 250$ today (1% discount rate) ‣ there are stronger implications -> infinite horizon: policy A: today low level of consumption (1000$ per month for every individual) -> at some period t we can go to 3000$ and stay there forever policy B: today 3000$ and at some period t 1000$ at which point t are there two policies indifferent? at this point we want to play with it ◦Nordhaus would say that A is better than B when the point t is at 100 but when we shorten the period more and more at the point of 17 he would say that the policy B is better then A -> in an excel table the point where these are indifferent ist 17 years something with a 4% discount rate ◦Stern is at the point with 69 years with 1% discount rate -> the same here he would say up until the point of 69 years that A is better than B but then he would change his mind ◦-> For them 17 years and 69 years are as valuable as the infinite amount after regarding the mammuts someone calculated that the people will last for 800 tousand years ◦we share the human existance in 400000 years and another 400000 years ‣ how can we share optimally 10000$ between the two groups if we say 5000$ - 5000$ we dont discount at all for example: 7000$ - 3000$ the optimal answer is 9999.9999…$ and the rest for the others (minmal amount) ->  thats a little bit weird how to share over time: issue is that exponential discounting works in some range and then how it continues it goes extreme quickly to minimal amounts ◦if we have a range of 0 to 100 its at 40 ◦if we have a range of 0 to 1000 its at 60 (intuitive would be that the point now is 400) ◦-> with an infinite amount we underestimate the values of the future ◦-> with an finite amount there is a rate between 0 and 1 can we do something else than exponential discounting? ◦there are 20 different ways to play with the future ◦highlight that we learn how to choose between those -> discounting rate should show how WE value the future (start with the view of people -> bring them in social welfare function -> optimal policy) Inequality one problem is to choose what you want to discuss about what is inequality? ◦low definition (the prof‘s): attitudes the difference between worse off and better off generations ◦if we divide 10 between two people -> graph between (10,10) -> give something from the poor to the rich: inequality goes up -> in a graph when we come closer to the 45° line inequality becomes smaller ◦if we have 3 people and distribute 30 -> surface between (30,30,30) -> its more difficult to say where inequality is -> on the line in the middle of the triangle the people 1 and 3 are the same -> going to the center is good -> any direction towards the center is reducing inequality (but only on the diagonals) ‣ points (15,15,0) or (22,4,4) -> which one has more inequality? -> there is no right answer because it depends how much priority you give the people (if you are a person who cares that anyone gets 0 you prefer the second one, if you are a person who doesnt want the rich to be much richer) -> the inequality is an ethical question (the rich is much richer or the poor is much poorer) -> in practice we use the gini coefficent gini coefficient: ◦two different income distribution: (0,0,20,20,20) or (6,6,6,21,21) -> which one do you prefer in terms of inequality? -> gini would say it has the same amount of inequality -> so gini fails because intuitive the second one is better because no one has an income of 0 ◦inequality is not a phenomenom that we can measure (its not objective) „the best one for discussing“: inequality of income ◦inequality is increasing -> relative inequality ◦the range of income is getting larger but all in all the equality is staying the same -> absolut inequality (poverty is overall decreasing) inequality matters for our way how we deal with heterogenity (somebody getting little or rich getting richer) ◦approach in the statistical: take a random number and say if it went down or up ◦in economics we use the sum (Summe) of utilities -> social welfare function is perfectly convex ◦if you decide between giving 50/50 or 49/52 to two persons -> as soon as there is an efficiency game around inequality you should do it, but most people dont do it because there is a cost of going away from the inequality that we cant measure ◦gini social welfare question: indifferent between giving 1 less for one person and therefore 2 more for the other person -> bad behavior when there is big inequality -> it would go with the fact that you take 100 from a person and give another 300 ◦inequality attitudes: efficiency is always more important indifference curves (in the triangle) -> circles around the middle point of the triangle: points where the level of inequality is the same -> variance is konstant -> if somebody gets 0 they dont really  care about ◦with the gini coefficient (in the triangle) -> hexagons around the middle point of the triangle ◦another point (in the triangle) -> triangles around the middle point of the triangle ◦ethical choice -> transparent about who we are prioritizing when we choose Discounting and inequality we dont know yet how the relationsship really looks like there are disethical choices and there is no optimal choice 8. lecture - International Environmental Agreements IEA‘s issue of collaboration (misbehavior of countries) difficult to operate and react when you have a goal until 2050 (long-term aspect), but for the investment we need so much time (changing technology) when you have a trading agreement you can better check if it works and environmental agreements are harder to control -> for example tax imports -> accountability is an other issue key difference: trial in the world trade organisation -> no central organisation that has power over all countries ◦environmental agreements: no mechanism by which we can punish countries (when they make actions) Research questions costly to improve the climate (free-riding problem) two types: ◦very strict, precise about the amount,etc. -> then it happens that countries dont join or want to get out of it -> higher degree of commitment but many countries who would join ◦soft agreements -> tend to include more countries theoretical framework non-cooperative game theory ◦strategic interactions between the countries two stages: ◦first stage: coalition game ‣ who wants to enter and sign an environmental agreement? ‣ when they enter they have a commitment ‣ idea that they join and sit down and try to sign an agreement to to something ‣ incentives to join are the own interest of the country ◦second stage: emission game ‣ agreement is about how much cut emissions ‣ each coalition has to sit down and discuss it would you enter a coalition? ◦interest of creating a coalition is that everybody joins and the overall benefits get higher ◦everybody is in a coalition: grand coalition -> makes everyone better off, because we solve the problems ‣ issue, that if youre a small country youre going to benefit of the others because they do something that effects the small country too, without having to pay it