Efficiency and future generations

Standard lessons from economics tell us that an externality creates inefficiency, and that this inefficiency can be removed by internalizing the externality. This papers considers how successfully these lessons can be extended to intergenerational externalities such as emissions of greenhouse gas. For intergenerational externalities, the standard lessons involve comparisons between states whose populations of people differ, either in their identities or their numbers. Common notions of efficiency break down in these comparisons. This paper supplies a new notion of efficiency that allows the lessons to survive, but at the cost of reducing their practical significance. 1. Pareto efficiency and some lessons from economics Emissions of greenhouse gas are a negative externality. Those who cause emissions do not pay the full cost of them; instead, they impose external costs on all the people around the world who suffer from the climate change they cause. Economics teaches us some important lessons about externalities. These lessons apply to both positive and negative externalities, but I shall concentrate on negative externalities such as greenhouse gas. The first lesson is that, except in some unusual circumstances, an economy that contains an externality is inefficient. Later I shall consider various definitions of efficiency, but for now I mean Pareto efficiency, which I define in terms of people’s preferences rather than in terms of what is better for people. For the moment I assume there is a fixed population of people. Pareto dominance. A state A Pareto dominates another B if and only if at least one person prefers A to B and no person prefers B to A. When A Pareto dominates B, I shall sometime say it is a ‘Pareto improvement’ on B. Pareto efficiency. A possible state B is Pareto efficient if and only if there is no possible state A that Pareto dominates it. A state is Pareto inefficient just when it is not Pareto efficient. By a ‘state’ I mean a state of the world or, in philosophers’ terminology, a world. By ‘possible’ I mean practically possible from the perspective of a particular time, given the Earth’s resources and technology. All states that are possible at a time share the same past up to that time. The second lesson is that, when a state contains an externality, there is a Pareto efficient possible state that is a Pareto improvement on in. The inefficiency caused by an externality can be completely eliminated, and not merely reduced, in a way that requires no sacrifice from anyone. That is to say, no one need end up in a state she disprefers. The third lesson from economics is that an externality can be corrected by ‘internalizing’ it. An externality is internalized if those who cause it pay a price for doing so that is equal to the external cost they impose on others. If the externality is internalized, it is no longer a source of inefficiency; if there is no other source of inefficiency, the resulting state is efficient. This is so even if the price paid is not passed on to those who are harmed by the externality. Although the state that results from internalizing an externality is Pareto efficient, it is not normally a Pareto improvement on the original state that contains the externality. Normally, some of the people who pay the internalized cost of the externality end up in a state they disprefer to the original one. But the fourth lesson of economics is that internalizing the externality can be done in a way that brings about a Pareto efficient state that is a Pareto