Reference no: EM131246363

Game Theory and Rawls versus the utilitarians

a. Suppose Jane a libertarian subscribing to Nozick's entitlement theory, which we will discuss Later in the course, in trying to scoff at the idea that there is. a difference between Rawl's egalitarian principles of justice and utilitarian ideals, states, after viewing the below table. "see, there's no difference between the utilitarians and the Rawlsians, when raced with the below payoff matrices below both Mena (player 1) and Raj (player 2) will choose exactly the same policies anyway." Is Jane correct? Why or why not?

(Mena, Raj) (Rawls world)	Build a bridge policy	Health care policy
Build a bridge policy	(2, 2)	(0,0)
Health care policy	(0,0)	(1.1)

Figure 1: Rawls world

(Mena, Raj) (Utilitarians' world)	Build a bridge policy	Health care policy
Build a bridge policy	(4, 4)	(3, 3)
Health care policy	(3, 3)	(2, 2)

Figure 2: Utilitarians world

II. Rawls, Economic. Justice and Pollution

Pollution - including greenhouse gas emission and the problem of global warming
(which are the two distinct economic justice problems, the biggest in human history as we will see soon enough) -- poses a number in interesting challenges in matters of economics justice.

This first exercise asks you to do some very simple economics analysis that will show just how difficult economic justice questions are. More importantly, this exercise will show you why practical economic policy making is extremely difficult -even in clear cut case because justice considerations simply cannot be set aside (as is routinely done in most economics courses).

The Predicament

Smallville has a thriving poultry industry -- which also means that the town stinks most of the time. Smallville is located in a warm part of the nation, so that stench of chicken production is a major problem, especially for poor people who cannot afford to live far from their place of work. As you know, poultry production also poisons water supplies and the land around a chicken processing plant (the seepage from cutting the chickens and the sloppy disposal of carcasses, blood and tainted water). Finally, workers in chicken processing plants suffer high rates of injury and illness (it is hard to automate chicken processing and the cutting process leads to workers' regularly injuring themselves on very fast assembly lines and being infected by chicken blood and the various bacteria and viruses that are evolving in the plant - proof of evolution is available on the floor of any major chicken processor and in the bodies of many very sick workers, whose ailments are frequently the result of new forms of human and crossover viruses developing in the plants).

Suppose the the market for chicken in SMAIIVIIIC is described by the following demand and supply equations:

Demand: p = 5 - 0.08Q

Supply: p = 1  (a flat supply curve -- and assume that prices arc equal to marginal costs)

where Q is measured in million of pounds and p is in dollars. So, it costs processors I dollar to produce a standard pound of chicken (non-standard pounds go into dug food, processed deli meats and other stuff you really do not want to eat). Further, suppose that the social costs associated with each pound of chicken produced is 50.50. The free market for chicken is represented by the diagram below

Each chicken sector worker produces an average of 50,000 pounds of standard chicken a year, working 40 hours a week for 40 weeks on average. (Chicken workers are usually quite sick for the rest of the time. They have no sick days -- so when they are sick they do not get paid. Their employers do not provide them with health insurance and they do not usually have union protection, so the costs of health care are borne entirely by workers in the form of lost pay and high medical bills as well as very long and not infrequently lethal waits at overcrowded public hospitals or, in many cases, faith healers.)

Question 1

What is the free market price and quantity of chicken'? What is the wage of the average chicken worker in the free market situation? What is the efficient configuration of the price and quantity of chicken once proper account is taken of the cost of all of the negative externalities?

Question 2

What arc the total annual social costs of the externalities associated with chicken production in the free market situation? What is the ratio of these total social costs to the wage income of workers in the free market? What is the per employed worker cost of the negative externalities? (This is an implicit tax on workers in Smallville,)

Question 3

What would a Rawlsian view of the negative externalities associated with chicken production be'? Is this a violation of his first principle of Justice" His second principle of justice?

Question 4

The town of Smallville is considering the following measures to help its chicken sector workers - who arc the vast majority of workers in the community:

1. A 50.50 per pound poultry tax on chicken to be paid by producers.

2. A system of marketable pollution permits that allows a chicken firm to produce 10.000 pounds of chicken per permit.

The permit system and the tax yield the same total revenue annually.

If the real rate of interest in the economy is 2%, what is the market price of a permit? (remember the market value of an asset is the present value of a constant infinite stream of payments of SR per year in perpetuity equal to R r where r is the real rate of interest in the economy) Which of these systems for pricing the negative externalities of chicken production arc consistent with a Rawlsian or Sen based egalitarian liberal view? (the creation of a permit system effectively turns a social bad -- pollution -- into an economic asset and a form of tradeable property.) (Extra credit- what would be the libertarian view of these policies?)

Question 5

A business columnist attacks all of the aforementioned proposals as job killers, and claims that there is no economic justice question here because workers have choosing to work in chicken processing in Smailville. She writes that "so long as everyone is free, then we must rely on the self-interest of workers to guide us in these matters. Workers arc making an informed choice to labor in the processing plants, which must mean that they believe that cracking chicken is their best option. Worse, these proposals will throw many people out of work, thereby robbing them of what little income and opportunity they do have!" Is there anything is wrong with this argument from a Rawlsian or Sen based egalitarian liberal view?

Supplementary material:

- 1. Wage of average worker: w= p*MPL where MPL is equal to level of output per worker (some pounds of chicken per year)
- 2. Wage income- wL, assume 0 economic long run profits (flat supply curve, and profits= pq-wL, so 0=pq-wL and pq -wL
- 4. Permit-internalize externality , costs per permit at per pound= externality price