Agenda for 11th Class
• Admin
– Slide Handouts
– No office hours tomorrow
• Cost-Benefit Analysis (cont.)
• Valuing non-monetary costs & benefits
• Utilitarianism & cost-benefit analysis
• Assignment for Next Class
– ##50-55
– Question to think about / Writing assignment for Group 3
• Questions on pp. 22 (but ignore references to Ulane &
Zuni)
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Questions on Cost Benefit Analysis
• 5. Construct a cost-benefit chart for negligence similar to the one above for
contract remedies. Compare the Hand formula for negligence to either (a)
strict liability or (b) no liability, or both. In this comparison consider a
precaution that would cost $9000 but that would avert accident costs of $1
million. An accident of that magnitude would occur with 1% probability if the
precaution were not taken, but would occur with 0% probability of the
precaution were taken. The precaution relates to an activity which
generates $1 million in profit for the defendant. In putting numbers in the
chart, remember to make a reasonable assumption about whether the
defendant will take the precaution, and that that assumption may differ
depending on the legal rule. That is, it is possible that the defendant would
take (or not take) the precaution if the rule were negligence according to the
Hand Formula, but not take (or take) the precaution if the rule were strict
liability.
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Valuing Nonmonetary Costs & Benefits
• How much is park worth?
– Might as question if conducting cost benefit analysis to determine
• whether park should be build
• whether park should be sold to alleviate budget deficit
• 2 methods
– Surveys
• If park not yet built, usually ask willingness to pay (WTP)
– Ask people “who much would you be willing to contribute to have
a park built at…”
• If park already built, usually ask willingness to accept (WTA)
– How much would you have to be paid in order to consent to the
demolition of the park at ….
– Assess behavior
• How much more expensive are houses near park, controlling for
other factors
• How much do home values go up when park is built nearby
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• How much do home values go down when park is demolished
Questions on Valuation
• 1) Are you repulsed by the idea that economists put a monetary value on
life? If so, why?
• 2) Is $9 million more or less than you would have guessed for the value of
life?
• 3) How would one ascertain the monetary value of clean air? Note that such
a valuation would be very useful in setting environmental policy, because
cleaner air costs more money. If clean air has a high monetary value, then it
would be sensible to require consumers to buy cars with expensive pollution
control equipment and to require electric utilities to switch from coal to
natural gas, even though doing so is likely to increase consumers’ electrical
bills.
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Entergy v Riverkeeper
• Clean Water Act, 28 U.S.C. § 1326(b), requires the Environmental
Protection Agency (EPA) to promulgate regulations so that “the location,
design, construction, and capacity of cooling water intake structures reflect
the best technology available for minimizing adverse environment impact.“
• In writing those regulations, the EPA used cost-benefit analysis and decided
that, while new power plants would have to use "closed-cycle cooling
systems" which kill no fish, existing power plants could employ less costly
technologies that reduced "aquatic organism" mortality by 80 to 95%, but did
not eliminate such mortality entirely.
• Environmental groups challenged those regulations, arguing that the "best
technology available" statutory language forbade the use of cost-benefit
analysis.
• Souter: “does it make any sense in these circumstances to think that you
really can do a cost-benefit analysis?”
• Joseffer (EPA lawyer): “I think the most irrational thing would be to just throw
up one's hands and say that we are going to impose standards whether or
not they do harm more harm than good, whether or not they make any
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sense.”
Questions on Entergy
• 1) As in Zuni, the statutory interpretation issue here is filtered through the
Chevron doctrine, which states that when an agency (such as the EPA) must
interpret an ambiguous statute in order to write regulations or bring
enforcement actions, the agency interpretation should be given deference.
That is, a court should accept the agency’s interpretation, as long as it is a
permissible construction of the statute, even if the court thinks another
interpretation would be better. Is 28 U.S.C. § 1326(b) ambiguous? Is the
EPA’s interpretation reasonable?
• 2) If you were a lawyer for the EPA, what kind of regulations would you have
written to implement 28 U.S.C. § 1326(b)? Would you have used costbenefit analysis?
• 3) How do you think the EPA determines the benefit of reducing aquatic
organism mortality? Or, in Justice Souter's words, what is the value of a
plankton?
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Utilitarianism & Economic Analysis
• Utilitarianism – government should enact laws and policies
which increase happiness in society
• Economic Analysis can be rough way of implementing
utilitarianism, because market prices and willingness to pay are
rough indication of how much happiness it will bring them
– But distorted because of differences in wealth and income
– $1 or $1000 brings more happiness to poorer person than richer person
• Declining marginal utility of money
• Dowrkin’s example
– Basic situation
• Derek values book $2
• Amartya values book $3
• Tyrant takes book from Derek and gives to to Amartya
– More specific example
• Derek is poor and sick. Loves book, but needs $2 to buy medicine
• Amartya is rich. Will probably never read the book, willing to pay $3, because might
read it.
• Tyrant takes book from Derek and gives it to Amartya
– Shows divergence between cost-benefit analysis & utilitarianism
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Redistribution of Income
• Utilitarian can justify because of declining marginal utility of money
– Taking $1 (or $1000) from rich person and giving it to poor person is
likely to increase happiness in society
• Although must take into account cost of taking money
– Cost of running tax system
– Disincentive for rich person to earn and save
• Rights based arguments for redistribution (Rawls)
– Equality is basic principle of justice, and economic inequality can only be
justified to the extent that it is necessary to encourage people to work
and generate income in the first place.
– People don’t deserve their income, because income largely attributable
to genes and childhood environment, which people get from parents
• Techniques for redistribution
– Progressive Taxes
– Social programs: Social security, welfare (TANF), Medicaid, Medicare,
Food Stamps
– Lawsuits: Very inefficient way of redistribution
• Very few actually benefit
• Lawyers get half (and they are not usually poor)
• Costs often passed back to consumers in higher prices
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• May distort incentives to take precautions, perform/breach contracts
Questions
• 1) In the Derek-Amartya example, would the cost-benefit analysis change if
Amartya paid Derek $2 for the book? $2.50? $3? Does your moral
evaluation of the situation vary depending on whether the Tyrant takes the
book from Derek and gives to Amartya or whether Derek voluntarily agrees
to a sale?
• 2) People around the world (and even in the United States) die every day
because they cannot afford relatively inexpensive medical treatments that
would keep them alive. Is it immoral for people to take vacations or buy
iPods and nice clothes when the money could be contributed to charities
(such as Doctors Without Borders) which would use the money to save
lives?
• 3) Are you convinced by the utilitarian or rights–based arguments for the
redistribution of income? If not, do you think redistribution of income is
unjust? Do you think there are better arguments for the redistribution of
income?
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