Can law and economics stand the purchase of moral satisfaction?

Publication Date15 August 2002
Date15 August 2002
AuthorRichard O. Zerbe
Richard O. Zerbe, Jr.
In recent years there has been a debate over whether or not moral
sentiments shouM be included in normative economic analysis. This paper
compares the standard normative criteria for benefit cost analysis, Kaldor-
Hicks, that does not include moral sentiments with a modification that does
called KHZ. The choice between these criteria should rest on which is the
most acceptable and useful The conclusion is that KHZ dominates KH even
by the standards of KH itself and that its use illuminates certain problems
in environmental law and economics such as comparing projects with
compensation and those without and whether discount rates should be used
in evaluating the far future.
For over sixty
years the practical criteria for economic efficiency, the Kaldor-
Hicks criteria, has excluded, or
at least
not properly included, moral sentiments
in normative economic analysis. In part this is due to historical reasons, in part
to normal inertia associated with any academic discipline and in part because
An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional
Design, Volume 20, pages 135--172.
© 2002 Published by Elsevier Science Ltd.
ISBN: 0-7623-0888-5
was until recently not greatly important to include them. This is no longer the
case. Existence values often reflect moral sentiments and such values can arise
with respect to traditional environmental amenities as well as historic buildings
that might, for example, be damaged in an earthquake. This paper asks if the
value of moral satisfaction and moral harm should be included in benefit-cost
analysis and, if so, what welfare criterion should be used to measure it. The issue
is important in environmental economics because questions of existence value
and of compensation for harm are prominent and can involve moral sentiments.
I conclude that moral sentiments are legitimately included in normative
economic analysis as their inclusion improves the quality of analysis, clarifies
issues in environmental economics and potentially improves decision making.
This conclusion rests on using a suitable metric, such as the one I suggest, that
captures normative sentiments for normative analysis. The implications of this
conclusion are that: (1) the potential compensation criteria should be dropped
in favor of a variant of Kaldor-Hicks which will better capture values actually
relevant to decision making; (2) standing issues in both law and economics
should rely (aside from questions of separation of powers and federalism in
law) on how well the relevant sentiments can be measured; (3) in principle,
existence values as a type of moral sentiment should be included in benefit-
cost analysis; (4) a project with compensation is different from the same project
without compensation and should be so recognized in efficiency analysis; and
(5) criticisms of the use of discount rates because they do not sufficiently recog-
nize future values arise because moral harm is not considered and are
unconvincing once moral sentiments are included.
I wish to suggest that common law doctrine disallowing relief or collection of
damages, as for example in awards of damages for emotional distress, can be
best understood as a problem in measurement. Courts will disallow damages
or standing to sue for damages or other relief where damages or the value of
relief can not be reasonably measured except in certain outrageous cases. I
suggest that in economics as in law the rule should be to include all sentiments
reasonably measurable.
2.1. The Legal Concept of Standing
Legal standing is especially relevant to economic analysis because it can provide
a reference point for reasonable expectations and psychological ownership. Legal
Can Law and Economics Stand the Purchase of Moral Satisfaction? 137
standing gives plaintiffs a right to sue. Although the particular details of the law
of standing can be arcane and complex, standing can be understood, aside from
consideration of separation of powers, as arising from measurement distinctions. 2
The doctrine of legal standing is derived from the "case or controversy" clause
of Article III of the U.S. Constitution. In Lujan v. Defenders of Wildlife (Lujan
H), the Supreme Court articulated three constitutionally required elements that
plaintiffs must demonstrate before they are entitled to legal standing. The Court
held that plaintiffs must show that: "(1) [they] ha[ve] suffered an 'injury in fact'
that is: (a) concrete and particularized, and (b) actual or imminent, not conjec-
tural or hypothetical; (2) the injury is fairly traceable to the challenged action of
the defendant; and (3) it is likely, as opposed to merely speculative that the injury
will be redressed by a favorable decision" (Friends of the Earth v. Laidlaw, 528
U.S. 167, 180 (2000)), citing Lujan, 504 U.S. 555, 560-561 (1992)).
The standing doctrine, however, also embraces several judicially self-imposed
prudential limits on the exercise of federal jurisdiction. Courts often deny third
parties legal standing because they are unable to demonstrate they have suffered
a concrete "injury in fact" or that their injuries are traceable to the defendant. 3
Courts also require that a plaintiff's complaint fall within the "zone of interests"
protected by the law invoked. 4 Less often, courts deny parties standing when
a decision by the courts would interfere with constitutional separation of powers 5
or raise grave federalism concerns. 6
By limiting the parties who can bring an action before a court of law, the
doctrine of standing helps courts guarantee that "the party whose standing
is challenged will adequately represent the interests he asserts" (Blackmun, J.,
dissenting in Sierra Club v. Morton, 92 S. Ct. 1361 (1972)). As the Court
explained in Baker v. Carr, this "concrete adverseness.., sharpens the presen-
tation of issues upon which the court so largely depends for illumination of
difficult constitutional questions." (Baker, 369 U.S. 186, 204 (1962)).
All the reasons for denying standing, except for separation of powers and
federalism concerns may be regarded as resulting from measurement issues
that arise in law as well as economics. 7 Clearly, a right that is hypothetical or
conjectural will be difficult for a court with limited institutional capacity
to measure. Moreover, where the causation of injury or the likelihood of its
redressibility is unknown, courts are unable to measure the benefits and costs
to parties involved. The disfavor in which the courts hold third party suits -
suits in which one claims to represent someone else's interest - may be
interpreted as a problem in measuring the primary person's interest solely based
on the third party's claim.
Courts have not yet fully articulated measurement concerns as the reasons
for standing issues. They should. Despite the long history of the standing

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