The Paretian Liberal Paradox and ecological economics

ECOLOGICAL ECONOMICS ELSEVIER

Ecological Economics 14 (1995) 45-56

Analysis

The Paretian Liberal Paradox and ecological economics Robert P. Berrens

a, *,

Stephen Polasky b

a Department of Economics, Uniuersity of New Mexico, Albuquerque, NM 87131, USA b Department of Agricultural and Resource Economics, Oregon State Uniuersity, Cort,allis, OR 97331, USA

Received 10 August 1994; accepted 30 January 1995

Abstract Two of the most basic considerations in collective choice are the Pareto principle and some minimal protection of individual rights. In his Impossibility Theorem, Sen (1970) shows that there is a potential inconsistency between preference sovereignty (as expressed by the Pareto condition) and the protection of minimal rights (a liberal or liberty condition). The Paretian Liberal Paradox (PLP), and the extensive debate surrounding it, prompts serious reconsideration of the traditional welfare economics approach. The critique of welfarism made by the PLP is of central importance for environmental issues given pervasive externalities, missing markets, uncertainty, and potential irreversibilities. Making collective choice decisions on these issues may require using explicit "non-utility" information and restricting individual preference sovereignty. We explore the implications of the PLP for long-term environmental policy and the transdisciplinary field of ecological economics. As a simple pedagogical device relying on sparse principles, the PLP stimulates an increased awareness of the potential conflict between preferences and rights. Recognition of the PLP focuses attention on what counts as admissible information in collective choice rules. For example, consideration of the PLP illuminates differences in the informational requirements of alternative sustainability concepts. Keywords: Welfarism; Pareto principle; Minimal rights; Sustainability

1. Introduction

Modern welfare economics begins with the idea that allowing individuals free choice over consumption and production decisions facilitates Pareto optimal (efficient) outcomes through the operation of competitive markets. There are two attractive features of this result. First, it protects individual rights and freedom; individuals are free to use their endowment in any way they see fit. * Corresponding author.

Second, the choices of individuals aggregate to a collective or social choice that is efficient in the sense that no individual's welfare can increase unless another individual's welfare declines. Even when the necessary assumptions for this result are violated, economists have shown great vigor in amending and extending the theory to show that market-based outcomes still may achieve efficient results. A major thrust of environmental economics has been to correct market failures, due to negative externalities and public goods, by extending the price system to incorporate the

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R.P. Berrens, S. Polasky / Ecological Economics 14 (1995) 45-56

value of environmental assets as estimated through revealed preference and stated preference approaches. The standard welfare economics approach, however, has been heavily criticized on both moral and ecological grounds (e.g., Sagoff, 1988; Daly and Cobb, 1989; Norton, 1989, 1995; Costanza et al., 1991). A key concern is that choices made by individuals today may affect not only the welfare of other individuals alive today, but also the welfare of other species and future generations. An efficient market outcome provides no guarantee of sustainability, continued ecosystem functioning, or species survival (Page, 1977; Foy, 1990). Leaving issues of reliable measurement aside, assigning non-market values to environmental assets provides no such guarantee either (Howarth and Norgaard, 1992; Bishop, 1993). Rights-based approaches to collective choice rules have been advanced as alternatives to the standard welfare approach for such issues as large-scale environmental change. For example, addressing questions of intergenerational equity depends on how we acknowledge the rights of future generations to environmental assets (Howarth and Norgaard, 1990). The prescriptions from the standard welfare economics approach to collective choice may conflict with the prescriptions of rights-based approaches. In a paper entitled " T h e Impossibility of a Paretian Liberal", Amartya Sen (1970) shows that protection of minimal individual rights and the Pareto principle are inconsistent for some configurations of individual preferences. There is now an extensive literature in economics and philosophy on the Paretian Liberal Paradox (PLP) that spans a quarter century and is ongoing (e.g., Gaertner et al., 1992; Sen, 1992; Hausman and McPherson, 1993). However, the implications of the PLP do not appear to have been explicitly linked to environmental or ecological economics. Allen (1988) argues that the PLP has striking implications for the role of both non-utility information and the Pareto principle in applied welfare analysis. Given the prominence of applied welfare economics in environmental policy debates, the PLP merits careful study by ecological economists.

The purpose of this paper is to show the relevance of the PLP to environmental issues. Fundamental debates about long-term environmental policy involve choices affecting the welfare of current and future generations, ecosystem function, and species survival in a potentially profound manner. The PLP points out basic problems with the standard welfarist approach. As we show, the critique of welfarism made by the PLP is of central importance for environmental concerns given pervasive externalities, missing markets, uncertainty and potential irreversibilities. In particular, by identifying the potential conflict between protecting the sovereignty of individual preferences and protecting future choice domains, the PLP is consistent with recent discussions of sustainability (e.g., Common and Perrings, 1992). Section 2 provides brief background on social choice theory, a statement of the PLP, and several examples of it. Section 3 contains a more detailed example of the PLP applied to an environmental problem. Section 4 explores the practical implications of the PLP for welfare analysis and applied environmental policy. Section 5 discusses the relationship between the PLP and the dependence on individual preferences in measuring non-market environmental values. Section 6 examines the issue of identifying what counts as admissible information in alternative definitions of sustainability. Section 7 contains concluding thoughts and discussion.

2. Social choice theory and Sen's Impossibility Theorem

In formal social choice theory, a collective choice rule is designed to establish preference relations between alternative social arrangements ("social states"). 1 A collective choice rule takes

i Social choice theory, as a subdiscipline in economics, grew out of early conceptualizations of alternative "social welfare functions" that ranked social states. Here we use the more general "collective choice rule". Social choice theory was established by Arrow (1951); extensive coverage is provided by Sen (1985), and reviewed in Hausman and McPherson (1993).

R.P. Berrens, S. Polasky / Ecological Economics 14 (1995) 45-56 the preferences of individuals over these alternative states as inputs, and generates an unambiguous social p r e f e r e n c e as an output. 2 Collective choice rules are then logical constructs based on a set of axioms. O n e such axiom is the P a r e t o principle, which holds that as long as one p e r s o n prefers a particular o u t c o m e and no one else is hurt by that o u t c o m e , then that o u t c o m e is a socially preferred choice. T h e index for individual p r e f e r e n c e satisfaction or well-being is utility. A p p l i e d welfare economics has sometimes b e e n p r o m o t e d as value-free or value-neutral because it rests on seemingly uncontroversial moral premises such as the Pareto principle (see Bromley, 1989a). However, the c o m m i t m e n t of welfare economics to value only outcomes, and to further value o u t c o m e s only in terms of individual utilities, is neither neutral nor uncontroversial (Hausm a n and M c P h e r s o n , 1993, 1994). T h e traditional e c o n o m i c a p p r o a c h to collective choice has its philosophical roots in utilitarianism. T h e normative content of utilitarianism has three basic elements: consequentialism, welfarism, and sum-ranking (Sen, 1987; Hamlin, 1989). Consequentialism evaluates all policy choices solely on the basis of their consequences for alternative social states (e.g., it does not specifically recognize process). Welfarism implies that the evaluation of social states is d o n e solely on the basis of individual utility information (e.g., o t h e r information is t r e a t e d at best as the raw material for a utility formulation). 3 Sum-ranking

2 Following Sen (1970), let Pi represent the ith individual's ordering over the set of all possible social states. Let [Pi] be the profile of individual orderings for all members of society. A collective choice rule is a functional relationship specifying a unique social preference relation P for any set of individual orderings [Pi]: P = f([P/]). A basic requirement on the collective choice rule is that it produce cyclical social preference orderings. 3 Welfarism is closely allied with methodological individual/sm in economics. Arrow (1994, p. 1) identifies methodological individualism as the assumption that individual decisions form a complete set of explanatory variables and are the necessary basis for all accounts of economic interaction. In an environmental policy context, Page (1991) critiques methodological individualism, and the dependence on predefined individuals with specific preference structures.

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implies that the aggregation of individual utilities for any social state will be r a n k e d by the sum of those individual utilities. Sen's Impossibility Theo r e m can be interpreted as a critique of the prevailing orthodoxy of welfare economics, and specifically of the welfarism c o m p o n e n t (Sen, 1977; Allen, 1988). In c o m m o n with other Impossibility T h e o r e m s in social choice theory (e.g., Arrow, 1951), the P L P begins by specifying a set of innocuous-looking conditions and then shows the f u n d a m e n t a l incompatibility between those conditions in the design of any collective choice rule. T h e Paretian Liberal P a r a d o x is based on the following three conditions: Condition U (the unrestricted d o m a i n condition): "every logically possible set of individual orderings is included in the d o m a i n (or possible outcomes set) of the collective choice rule" (Sen, 1970). Condition P (a weak version of the Pareto principle (e.g., Arrow, 1951): if every individual prefers alternative x to alternative y (x P~ y, V i), then society as whole must prefer x to y (x P y). Condition L (the liberal condition): for each individual i there is at least one pair of alternatives ( x , y ) such that for i, if x Pi Y, then for society, x Py. T h e unrestricted d o m a i n condition allows for individual preferences that d e p e n d on things other than what an individual consumes. A n individual may be altruistic, or may care about the equality of the outcome, or may care directly about what others are consuming. Condition L is not m e a n t to provide a complete specification of liberty or a liberal society, only to introduce a minimalist protection of rights into the consideration of collective choice rules. Liberty involves the assignment of rights to individuals (or groups), not on the basis of welfare comparisons, but on the a c k n o w l e d g e m e n t of a special relation between a p e r s o n and certain choices t h o u g h t in some way to be of importance to t h e m (Sen, 1983). F o r example, typically individuals are granted the right to m a k e choices over their own m a r k e t c o n s u m p t i o n bundles. G r a n t i n g condition L implies the existence of a " p r o t e c t e d s p h e r e " of choice for all individuals (Sen, 1976).

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No consideration is made here for extensions to non-human rights or non-consequentialist (deontological) approaches to rights (e.g., Nozick, 1974; Hamlin, 1989); rather, the focus is on the implications stemming from a particular formulation of minimal rights. Sen's Paretian Liberal Paradox can be stated as: Impossibility Theorem: There is no collective choice rule that can simultaneously satisfy U, P, and L. Formal axiomatic proofs of the PLP can be found in Sen (1970, 1976). The basic logical validity of the PLP has withstood 25 years of discussion in economics and philosophy. To avoid the inconsistency, consideration must be given to rejecting or modifying one of the conditions. 4 Most attempts to circumvent or "resolve" the PLP amount to commentary on how restrictive the initial conditions are (Allen, 1988; Sen, 1992). Such debate has inherent value in understanding both the ideological and methodological implications for collective choice. There have been numerous reformulations and extensions of the PLP (e.g., Gibbard, 1974). Important extensions, with relevance to environmental issues, include application of the PLP to group rights (Batra and Pattanaik, 1972), and to loyal agents acting on behalf of a special obligation to others (Gardenfors and Petit, 1989). The PLP can be demonstrated by means of a simple example, adapted from Sen (1970). 5 Suppose there are two individuals, H e r m a n (H) and Julian (J). Each individual has the right to choose

4 A majority of the attempts to find a solution to the PLP concentrate on modifying condition L (Gibbard, 1974; Blau, 1975; Suzumura, 1980; Kruger and Gaertner, 1983). Nozick (1974) accepts the paradox but gives liberty rights priority. A n u m b e r of suggestions modify condition P (Sen, 1976; Suzumura, 1978; Austen-Smith, 1982). There are even discussions of restricting condition U, in what is referred to as the "admission of defeat" solution (Blau, 1975; Fine, 1975). Additional informational inputs are also suggested (Ng, 1971; Sen, 1976; Suzumura, 1978; Webster, 1986; Vallentyne, 1989). 5 The initial example used to illustrate the PLP is the case of "lewd" and " p r u d e " who have distinctly opposite tastes concerning who should or should not read Lady Chatterly Lover by D.H. Lawrence.

whether or not to read the newest issue of Ecological Economics. H e r m a n would like to read the issue. Further, he thinks that it is very important that Julian read it. Julian, on the other hand, does not want to read the issue. Further, he thinks that it is very important that H e r m a n not read it. There are four possible outcomes: (a) both read, (b) H reads and J does not, (c) J reads and H does not, (d) neither reads. H e r m a n ' s preferences are: a PH C PI4 b PI4 d. Julian's preferences are: d Pj c Pj b Pj a. Note that outcome c is preferred to outcome b by both individuals so that b can be eliminated as a social choice because it violates condition P. Since each individual decides for himself whether or not to read the issue, other outcomes can be eliminated as violating condition L. For example if J is going to read the issue, H has the right to choose between outcomes a and c. n prefers outcome a to outcome c. Therefore, c can be ruled out as the social choice because it violates condition L. Outcomes a and d can be ruled out in a similar manner. No outcome exists that does not violate either condition P or condition L for these preferences. In game theoretic terms, this example can be interpreted as a variant of the Prisoner's Dilemma. 6 In Fig. 1, we represent the example as a normal form game. H e r m a n ' s strategies are to read or not read the issue (select the top or bottom row). Similarly, Julian has the right to choose the right or left column. The first number in each box is the payoff for H e r m a n and the second number is the payoff for Julian, when they choose that particular combination of strategies. The unique Nash equilibrium for the game is outcome b with payoffs of (1,1). This outcome is Pareto dominated by outcome c with payoffs of (2,2). It is the strong reciprocal interest e m b e d d e d in the given preferences that lies at the heart of the

6 T h e r e are a n u m b e r of approaches that formulate the PLP in a game theoretic framework (e.g., Fine, 1975; Sugden, 1985; Gaertner et al., 1992; Binmore, 1994). The game form allows for a natural specification of rights by giving individuals choice over their strategies or actions (Gaertner et al., 1992).

R.P. Berrens, S. Polasky / Ecological Economics 14 (1995) 45-56

Julian Read

Don't Read

a

b

3,0

1,1

c

d

2,2

0,3

Read Herman Don't Read

Fig. 1. Normal form game for the H e r m a n and Julian example.

paradox (Blau, 1975). In other words, when the choice of some individual affects the well-being of another, the PLP can arise. The essence of environmental issues is that the choices made by some individuals affect the welfare of other individuals (i.e., externalities). Thus, the central role of interdependencies suggest that the troublesome preferences that cause the PLP to arise are likely to be present in policy choices where environmental issues are important. These range from current concerns (e.g., preferences versus environmental justice in hazardous waste facility siting) to intergenerational conflicts. On the latter, consider the following example. T h e r e are two generations (for simplicity). Generation Y has the right to insist on "sustainability", which imposes a minimum requirement on the value of the bequest that Generation X leaves for Generation Y, as measured by the preferences (valuation) of Generation X. G e n e r a tion X, however, has the right to choose the composition of the bequest. In particular, they can choose to bequest primarily machine capital or natural capital. Generation X, being selfcentered and myopic, would like to leave a smaller bequest than required by sustainability. G e n e r a tion X would prefer to bequest machines rather than nature, though the size of the bequest is the dominant issue for them. Generation Y would like to receive a larger bequest, though they would prefer a small bequest of nature to a large bequest of machines. Just as in the previous example with H e r m a n and Julian, the only outcome

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that is not ruled out by condition L, in this case a large bequest of machine capital, is ruled out by condition P, as both generations would prefer to have a small bequest of natural capital to a large bequest of machine captial. One concern with the sustainability example, and intergenerational conflicts between preferences and rights, is that it deals with the preferences of potential people. 7 It might be preferable to have an environmental example of the PLP that links current decision makers, and still relates to the bequest package that is turned over to the future. Protecting the rights of future generations requires some current agent to act on behalf of a special obligation to the future. In the next section, we give a slightly more complicated example of the PLP in the context of allocating a current environmental bequest where preferences and rights conflict, and the resolution has potentially important implications for the structure of the bequest package given to succeeding generations.

3. A stylized example: Aunt Edna's bequest Through the unfortunate demise of their great Aunt Edna, there is a bequest available to two brothers. Brother Arthur (A) is a logger, while brother Bill (B) is an environmentalist. The bequest consists of two separate parcels of Old Growth Forest, one of 5000 acres and one of 10000 acres. Entitlement restrictions on the bequest of the land require that each parcel be owned by a single brother and managed as a single unit (either complete logging or complete preservation). The two brothers must decide on how to allocate the land among themselves. If the bequest is not acted upon promptly, then either

7 As argued by Norton (1989, p. 137), we cannot strictly identify future individuals: i.e., current environmental policy choices may determine the specific composition and profile of future generations. Thus, in our sustainability example we employ a fictional future generation, and the conflict is between group rights and preferences, which can also be subject to the PLP (Batra and Pattanaik, 1972; Gardenfors and Petit, 1989).

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o r b o t h p a r c e l s will be g r a n t e d free of c h a r g e to F i c t i t i o u s S t a t e U n i v e r s i t y to b e u s e d for an i n d e t e r m i n a t e p u r p o s e . B o t h A a n d B p r e f e r the large to t h e small p a r c e l , a n d t h e o t h e r ' s o w n e r s h i p o f no l a n d to t h e i r own o w n e r s h i p o f t h e l a r g e r parcel. U s i n g t h e n o t a t i o n [1, 1 / 2 , 0] to d e n o t e o w n e r s h i p o f t h e large p a r c e l , the small p a r c e l , a n d o f no p a r c e l , respectively, t h e n it is p o s s i b l e to identify seven social states for the o r d e r e d p a i r (A,B): "

Table 1 Summary of the stylized example: Aunt Edna's bequest Pairwise Decisiveness Social Choice comparisons preference criterion x vs. y y vs. z z vs.w w vs. x

(x Pi Y), V i A: DA(y, z)

(zPi w),V i B: DB(w, x)

(x Py) (yPz) (zPw) (w Px)

Pareto Liberal Pareto Liberal

Source: Adapted from Allen's "work-choice" example of the PLP (1988).

x = ( 1 / 2 , 0), y = (1, 1 / 2 ) , z = ( 0 , 1 / 2 ) ,

w = ( 1 / 2 , 1), k = (1, 0 ) , m = (0, 1), n = (0, 0)

(1)

e x a m p l e o f this acyclicity is p r e s e n t e d in T a b l e 1, w h e r e any state p r e f e r r e d on c o n d i t i o n P , is r e j e c t e d on the l i b e r a l c o n d i t i o n .

Assuming utility maximizing behavior, the full i n d i v i d u a l p r e f e r e n c e o r d e r i n g s given to the p r o b l e m c a n b e r e p r e s e n t e d by: A : ( k PA x PA Y PA n PA z PA w PA m ) B:(mP BzP B wP, nP 8xP ByPBk)

(2)

F o l l o w i n g Sen (1970), t h e g r a n t i n g of m i n i m a l rights can b e c o n s i d e r e d as g r a n t i n g decisiveness (D i) to an i n d i v i d u a l i over t h e choice b e t w e e n two social states. Specifically, in this e x a m p l e if any two social states differ only in t h e level o f l a n d o w n e r s h i p o f i n d i v i d u a l i, t h e n individual i is decisive over t h o s e social states. 8 T h e decisiveness c o n d i t i o n s on m i n i m a l rights for A a n d B can b e r e p r e s e n t e d as follows: A : D A ( y , z ) , D A ( w , m ) , DA(X,n), D A ( k , n ) ,

DA( X,k ) B: DB( x , w ) , Dn( k , y ) , DB( z , n ) , D B ( m , n ) , DB(z,m)

(3)

F o r all o t h e r o r d e r e d p a i r s of social states, only c o n d i t i o n P p e r t a i n s . If social choice is t h e p r o d uct o f p a i r w i s e c o m p a r i s o n s , a n d S e n ' s I m p o s s i bility T h e o r e m c o n d i t i o n s a r e a p p l i e d , t h e resulting social p r e f e r e n c e o r d e r i n g is intransitive. A n

s This is slightly stronger than condition L by extending the protected sphere beyond a single choice (Gibbard, 1974; Sen, 1983; Gaertner et al., 1992). For every individual i and for all distinct social states ~0 and oJ, if q~ and w differ only with respect to i's recognized personal sphere (the level of land ownership), then i is granted decisiveness over {qJ,~o}.

4. Practical relevance of the PLP T h e extensive d e b a t e over t h e P L P has b e e n c o n d u c t e d largely within the f o r m a l f r a m e w o r k o f social choice t h e o r y in e c o n o m i c s , which m a y c l o u d its p r a c t i c a l i m p l i c a t i o n s (Sen, 1983). T h e P L P shows that allowing m i n i m a l rights as a c o n d i t i o n o f social choice m a y b e i n c o n s i s t e n t with t h e c o n d i t i o n o f p r e f e r e n c e sovereignty (the P a r e t o principle). T h e l a t t e r c o n d i t i o n c a r r i e s a special p l a c e in e c o n o m i c efficiency analyses, w h e r e t h e effects o f policy c h a n g e s a r e j u d g e d relative to t h e i r c a p a c i t y for p r e f e r e n c e satisfaction. 9 A s C o w e n (1993, p. 253) notes: " n e o c l a s s i cal w e l f a r e e c o n o m i c s is t h e analytical e m b o d i m e n t of this p r e f e r e n c e s o v e r e i g n t y n o r m . " G i v e n the prominence of traditional welfare economics in m a n y e n v i r o n m e n t a l policy d e b a t e s , t h e P L P p r e s e n t s an i m p o r t a n t c h a l l e n g e . W e a r g u e t h a t t h e P L P has special r e l e v a n c e to l o n g - t e r m e n v i r o n m e n t a l issues. A s n o t e d p r e -

9 The analytical apparatus requires that for some initial distribution of wealth, the welfare-maximizing outcome is the one that exhausts all possible gains from trade (defined relative to ordinal preferences). The strict Pareto principle implies that all externality-free voluntary trades increase welfare. In applied benefit-cost analysis, an attempt is made to identify potential Pareto improvements, where net benefits from a policy change could potentially be re-allocated to fully compensate losers, and leave everyone better off, although no such compensation is required (Cowen, 1993).

R.P. Berrens, S. Polasky //Ecological Economics 14 (1995) 45-56

viously, externalities, or interdependencies, which are a root cause of the paradox, are especially prevalent for many environmental issues. Peacock and Rowley (1972) assert that the basic paradox is especially prominent in the consideration of income redistribution. Consideration of environmental issues raises the additional concern of intergenerational equity. One suggestion for circumventing the PLP requires the introduction of cardinally measured preferences (Ng, 1971). In theory, some enlightened planning agent could use an aggregated present value money metric to guide social choice (i.e., benefit-cost analysis). But, such an approach does not alleviate potential conflicts between rights and preferences, it only gives priority to preferences. Furthermore, given their inherent non-market nature, there is a distinct lack of reliable welfare information for the long-term values of functioning ecosystems, and other composite environmental services (see Section 5). A second common suggestion for circumventing the PLP is the allowance for Pareto-improving contracts, negotiations, or trade (i.e., market transactions). Sen (1992) argues that the possibility of such contracting has never been the issue, rather the focus is on: (i) the likelihood that such "other-regarding" contracts will occur, and (ii) the likelihood that such contracting could be enforced, given the initial specification of preferences. These concerns about contracts are especially problematic in long-term environmental policy choice, which involve the interests of both current and future generations. Since future generations are not here, they cannot negotiate contracts with the current generation (Bromley, 1989b). Even when all parties are present, contracts may not be enforceable and markets may not exist. For example, it will be impossible to verify that H e r m a n has not read the latest E c o logical E c o n o m i c s unless the publication itself is banned (perhaps at the insistence of Julian). The problem of imperfect (current), and altogether missing (future) markets severely restricts opportunities for trades, negotiations or contracts to alleviate the PLP should it arise. While it might be argued that likelihood of establishing and enforcing such other-regarding

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contracts is low in environmental conflicts, the a fortiori argument is that they do not really solve

the initial conflict (Sen, 1992). The PLP shows that there is a lack of coherence in collective choice rules that sanctify both preference sovereignty and minimal rights. Opportunities to contract address the possibility for tractable solutions to the PLP, but do not address the coherence issue. 10 There are some cases where rights trading would not be socially sanctioned (Anderson, 1993), or rights are legally inalienable (see Bromley, 1989a). One example is concern against allowing Third World countries to be paid for the acceptance of hazardous wastes or heavy polluting industries (to trade away the right to minimal protection against hazardous waste health risks). The debate begun when a 1992 internal memorandum written by World Bank chief economist Lawrence Summers was leaked to the press is instructive of the difference in views between those for whom everything is tradeable, and others for whom certain rights are inalienable (see Goodstein, 1995, p. 177). The implications of the PLP for environmental economics and applied welfare analysis seem to have been largely overlooked. It is instructive to consider Sen's specific motivations in presenting his Impossibility Theorem. In an early review, Sen (1976) identifies two important issues: (1) Is it acceptable to simply take individual preferences as given when pursuing difficult social objectives? (2) Is there a need to include information besides individual preferences in judgements or social choices?

10On the tractability versus coherence distinction, we are indebted to an anonymousreviewer. Sen states (1992, p. 146): "To cite as a reason ... the fact that such a contract would be the only way of getting--and sustaining--a Pareto-optimal outcome is to beg the question, since the motivation for discussing the impossibility result is precisely to question and assess the social merits of Pareto Optimality." Gibbard (1974) proposes a solution to the PLP by making rights alienable in particular situations. Nagahisa (1989) notes that the Gibbard solution may be defective if the rights-waiver cannot guarantee individual rationality.

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Specifically, are there cases where collective choice rules may want to limit the use of individual preferences, and what is the role of non-utility information in such rules? The range of possible types of non-utility information is large. Examples include class relationships, income differentials, the political and legal history of a conflict, institutional setting (Allen, 1988), motivations underlying expressed preferences (Sen, 1983, 1987; Sagoff, 1988; Hausman and McPherson, 1993), 11 and ecological parameters. In particular, the types of ecological parameters that may need to be considered include system threshold effects, potential irreversibilities, the degree of uncertainty, and the length of time frames (Norton, 1995). In an essay on methodological individualism in economics, Arrow (1994) argues that technical information, not attached to any particular individual or firm, can have an "irreducibly social component" that is essential to understanding any social system. Likewise, ecological parameters are important indicators of physical systems that underlie social systems, and may not be reduced to raw inputs for economic functions (Page, 1991). While the notion of restricting the use or reliance on individual preferences "raises the hackles" of economists, there are some discussions questioning the traditional veneration of individual preferences. For example, Lerner (1972) notes that public good aspects of ecological protection might justify constraints on preference sovereignty. Cowen (1993) discusses the limits of preference sovereignty in assessing the welfare of future generations, and in cases of imperfect information concerning environmental risks. 12

ll Sagoff (1988) emphasizes the role of individuals as citizens in the ongoing, deliberative, public choice process, rather than simply consumers. Thus, a distinction is made in the motivation between types of preferences (citizen versus consumer). Such a distinction (self-regarding versus other-regarding preferences) can also be found in Sen (1987). i2 These issues are complicated by the lack of a single reference point for assessing welfare change. For example, future preferences for the environment may be contingent upon the protective actions we take today. Thus, future preferences are endogenous to the current choice problem, as opposed to traditional economic assumptions (Cowen, 1993).

Common and Perrings (1992, p. 31) argue that if existing preferences and technologies are not ecologically sustainable, then it may be necessary either to regulate activity within the existing structure of preferences, or to change that structure of preferences, or both.

5. Relationship of the PLP to non-market valuation

One of the key issues raised by the PLP is whether individual preferences, as currently given, should form the basis for environmental policy. In some cases basing policy on preferences may trample rights (see Section 6). Even when we assume the primacy of preferences, however, using individual preferences to set collective environmental choice may be problematic. Since most environmental goods and services are not priced and traded in markets, preferences must be measured through specialized techniques. Over the last several decades, economists have invested considerable effort in the development of a battery of techniques for valuing non-market environmental goods and services (Freeman, 1993). Non-market valuation techniques include both revealed preference and stated preference approaches. In particular, applications of the survey-based contingent valuation method (CVM) have grown rapidly. 1 3 A s Arrow (1994, p. 1) notes, "the typical economist's argument today for government intervention to protect the environment rests on individual valuation". There is considerable recent debate on the reliability and validity of measures of non-market environmental values. Given its success in some near-market applications for familiar goods (e.g., 13 Individual preferences are measured using CVM surveys by eliciting expressions of willingness to pay (or be paid) for some hypothetical change in environmental goods and services. Controversial applications extend C V M to the measurement of non-use values (e.g., existence values). CVM has recently received the qualified endorsement of the National Oceanic and Atmospheric Administration ( N O A A ) "blue-ribbon" Panel (Arrow et al., 1993). The N O A A Panel was convened to provide guidance for measuring lost non-use values in natural resource damage cases.

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use v a l u e s for o u t d o o r r e c r e a t i o n ) , it is t e m p t i n g to t h i n k t h a t C V M m i g h t be a p p l i e d to assess the total e c o n o m i c v a l u e of b r o a d e r e c o s y s t e m function, o r c o m p o s i t e services such as biodiversity. H o w e v e r , V a t n a n d B r o m l e y (1994) a r g u e that e n v i r o n m e n t a l services e m b o d y c h a r a c t e r i s t i c s that p r e s e n t s e r i o u s c o m p l i c a t i o n s w h e n collective c h o i c e s a r e b a s e d on t h e a g g r e g a t i o n of individual v a l u e s e l i c i t e d by C V M . R e l i a b l e m e a s u r e ment requires the presence of a precisely demarcated commodity. Further, preference formulations for m a n y e n v i r o n m e n t a l issues r e q u i r e c o m plex c h a i n s of p r o b a b i l i s t i c r e a s o n i n g ( H a u s m a n a n d M c P h e r s o n , 1993), a n d m a y be b a s e d on false beliefs ( H a u s m a n a n d M c P h e r s o n , 1994). T h e "functional transparency" of many ecosystem components implies that many individual prefere n c e s a r e likely to b e p o o r l y i n f o r m e d ( V a t n a n d B r o m l e y , 1994). P r o b l e m s with the v a l u a t i o n of i n d i v i d u a l n o n - m a r k e t p r e f e r e n c e s for w h o l e ecosystems, a n d b r o a d c o m p o s i t e s o f e n v i r o n m e n t a l services, m a y b e s y m p t o m a t i c o f l a r g e r p r o b l e m s with welfarism in collective choice. H o w e v e r , it is i m p o r t a n t not to c o n f l a t e t h e issues o f t r a c t a b i l i t y a n d c o h e r e n c e o f w e l f a r i s t - b a s e d a p p r o a c h e s to collective choice. T h e P L P d i r e c t s a t t e n t i o n t o w a r d t h e issue o f c o h e r e n c e , a n d t h e p o t e n t i a l conflict b e t w e e n p a r t i c u l a r c o n f i g u r a t i o n s of p r e f e r e n c e s a n d m i n i m a l rights. In this way, t h e P L P is consist e n t with the t h e o r e t i c a l result t h a t even p e r f e c t m e a s u r e m e n t o f n o n - m a r k e t v a l u e s p r o v i d e s no guarantee of sustainability (Howarth and Norg a a r d , 1992; Bishop, 1993). If w e l f a r i s m is not an a d e q u a t e b a s e , t h e n t h e n a t u r a l q u e s t i o n is w h a t n o n - p r e f e r e n c e i n f o r m a t i o n m i g h t b e u s e d in setting l o n g - t e r m e n v i r o n m e n t a l policy. 14

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(1993, p. 717) state: " S e n ' s P a r a d o x d o e s u n d e r score t h e i m p o r t a n c e of p e r m i t t i n g o t h e r things b e s i d e s p r e f e r e n c e s to c o u n t . " A s n o t e d previously, we view the issue of d e t e r m i n i n g w h a t c o u n t s as a d m i s s i b l e i n f o r m a t i o n in the d e s i g n of collective choice rules to be o n e o f the p r a c t i c a l i m p l i c a t i o n s o f the PLP. Its special r e l e v a n c e to e n v i r o n m e n t a l policy choice is e v i d e n c e d in t h e d e b a t e over a l t e r n a t i v e d e f i n i t i o n s o f sustainability. S u s t a i n a b i l i t y is a topic t h a t has r e c e i v e d b r o a d p o p u l a r a t t e n t i o n d u r i n g the p a s t d e c a d e , a n d b e c o m e a c e n t r a l focus of w o r k in ecological e c o n o m i c s . W h i l e it has p r o v e n difficult to pin down an exact d e f i n i t i o n of sustainability, most definitions share certain essential features. B r o a d l y s p e a k i n g , s u s t a i n a b i l i t y is a b o u t m a i n taining t h e c o n d i t i o n o f a system so that objectives can be m e t at least as well in the f u t u r e as in t h e p r e s e n t . Sustainability, then, is a r i g h t s - b a s e d c o n c e p t in which f u t u r e g e n e r a t i o n s m u s t be given c o n d i t i o n s t h a t a r e at least as f a v o r a b l e , in s o m e specified d i m e n s i o n s , as they a r e now. ~5 In g r a n t i n g rights to f u t u r e g e n e r a t i o n s , the c o r r e l a t i v e duty o f the p r e s e n t g e n e r a t i o n m e a n s t h a t s o m e r e s t r i c t i o n s on p r e f e r e n c e s may be n e c e s s a r y in o r d e r to g u a r a n t e e sustainability. T h e inconsistency o f s u s t a i n a b i l i t y a n d p r e f e r e n c e sovereignty is a s t r a i g h t f o r w a r d e x a m p l e o f the i m p l i c a t i o n s o f the PLP. T h e inconsistency has b e e n r e c o g n i z e d e l s e w h e r e (e.g., C o m m o n a n d Perrings, 1992; H o w a r t h a n d N o r g a a r d , 1992). In a p r a c t i c a l policy context, S p a s h a n d S i m p s o n (1994) r e c o g n i z e a n d d e t a i l t h e conflict b e t w e e n u t i l i t a r i a n a n d r i g h t s - b a s e d a p p r o a c h e s to p u b l i c p r e s e r v a t i o n choices for a r e a s of special scientific o r ecological interest. T h e r i g h t s - b a s e d a p p r o a c h e s t a b l i s h e s a m i n i m u m t h r e s h o l d or stock of sites

6. R e l e v a n c e of the P L P to sustainainability In t h e i r r e c e n t essay on the i n t e r p l a y b e t w e e n ethics a n d e c o n o m i c s , H a u s m a n a n d M c P h e r s o n

14 Recognizing such limitations, some economists advocate safe minimum standard approaches to sustainability and environmental preservation issues (e.g., Foy, 1990; Bishop, 1993). Any practical application of the safe minimum standard approach would appear to require explicit non-utility information (e.g.. minimum instream flows or viable populations).

15One widely known definition is provided by the Bruntland Commission (WCED, 1987: 43): "Sustainable development is development that meets the needs of the present without compromising the ability of the future to meet their own." The operational difficulty is in interpreting the concept of needs (Pezzey, 1992). As one link with the PLP, to operationalize the concept of needs would require that rights be restricted, or that preference profiles somehow be edited. Rawls' (1981) concept of primary goods may be viewed as one such editing.

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to protect, while the utilitarian approach excludes such exogenous constraints on site protection choice. The notion of sustainability to this point was left suitably vague and general to incorporate virtually all definitions. Now let us differentiate between two common definitions of sustainability: (i) non-declining welfare or a related measure of non-declining value of total capital stocks both human-made and natural (e.g., Pezzey, 1992; Solow, 1992; Dorfman, 1993); and (ii) non-declining physical measure(s) of natural capital stocks (e.g., Common and Perrings, 1992; Costanza and Daly, 1992). The two approaches to defining sustainability differ fundamentally in what counts as admissible information in determining collective choice. The first view collapses all relevant information into a single metric of aggregated monetary welfare (or more generally aggregated economic value). Collective choice is based strictly on aggregated preferences over the set of feasible outcomes. Costanza and Daly (1992), on the other hand, explicitly incorporate non-utility information (e.g., the constancy of the natural capital stock). Norton (1995) characterizes ecological economics as advocating a more structured bequest package left to future generations. Such a bequest package would contain an appropriate mix of human and natural capital with special reference to the integrity of functioning ecosystems and species survival. The case for inclusion of non-utility information in collective choice is especially strong when dealing with bequests that the current generation leaves for the future. Information about the structure of individual preferences in the further future is extremely limited (Cowen, 1993). The notion of a structured bequest package is important, whether it be for environmental assets or other social foundations such as health and educational institutions, because of the protection it provides to future choice domains. While abstract utility or preference satisfaction cannot be bequeathed, future rights (capabilities) can be protected by bequeathing particular environmental assets (Costanza and Daly, 1992). If we interpret Sen's Impossibility Theorem as an example of the

inadequacy of the informational structure of traditional welfare economics and welfarism (Allen, 1988; Hausman and McPherson, 1993), then a clear methodological challenge has been issued for how economists approach intergenerational transfers and sustainability.

7. Concluding thoughts and discussion Sen's Impossibility Theorem focuses on potential inconsistency between preference sovereignty (as expressed by the Pareto principle) and the protection of minimal rights (a liberal or liberty condition). This result is rather surprising, in part because the unanimous consent implied by the Pareto principle has been conventionally interpreted by applied welfare economists as protecting individual liberty (see Kneese et al., 1983). The Paretian Liberal Paradox (PLP), and the extensive debate surrounding it, prompts reconsideration of what counts as admissible information in collective choice rules. The PLP is part of Sen's broader criticism of welfarism as an informationally-constraining collective choice condition (Sen, 1977, 1979, 1985, 1987, 1991, 1992; Sugden, 1993). Given pervasive externalities and missing future markets, PLP-style problems are likely to be in full force for many collective environmental choices. The absence of reliable welfare information for current non-market environmental services only exacerbates such problems. The role of non-utility information is of particular relevance to ecological economics and sustainable environmental management, where social choice problems may be characterized by long time frames, a high degree of uncertainty, irreversibilites and system threshold effects. We submit that sustainability is fundamentally about protecting the rights of future generations, and that non-utility information is a critical input for such protection. Normative social policy concerning the sustainable use of environmental systems should not be bounded by welfarism and based solely on the structure of current preferences. This is not to argue that individual preference measures should not count (and see Sen, 1991), but rather to

R.P. Berrens, S. Polasky / Ecological Economics 14 (19951 45-56 emphasize the issue of what additional informat i o n is v i e w e d as a d m i s s i b l e in c o l l e c t i v e e n v i r o n mental choices.

Acknowledgements H e l p f u l review c o m m e n t s w e r e p r o v i d e d by Emery Castle, Don Cocheba, Dave Ervin, George Foy, Eban Goodstein, Andy Keeler, Bryan Norton, and several anonymous reviewers. Responsibility f o r a n y e r r o r s o r i n t e r p r e t a t i o n s r e m a i n s solely with the authors.

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