Environmental Justice AnalysisTheories, Methods, and Practice - Chapter 2 pptx

These theories are derived largely from traditionalsocial and scientific work and include theories of justice, theories of risk, economictheory, health theories, location theory, theorie

in that constellation, the concrete puzzle-solutions which, employed as models orexamples, can replace explicit rules as a basis for the solution of the remainingpuzzles of normal science” (Kuhn 1970:175) The scientific development processcan be summarized as periods of preparadigm, paradigm development, paradigmarticulation, paradigm extension, and paradigm crisis (Galloway and Mahayni 1977).Applying the Kuhn structure, theories of environmental justice and equity areapparently in the preparadigm period Currently, there is no consensus on a singleparadigm, but instead competing theories and hypotheses offer different explanationsfor environmental justice issues These theories are derived largely from traditionalsocial and scientific work and include theories of justice, theories of risk, economictheory, health theories, location theory, theories of urban development, and theories

of neighborhood change In this chapter, we will review relevant bodies of literatureconcerning these theories and deduce from them some hypotheses about environ-mental justice

The theories reviewed here are in themselves subjects of many years’ research,which has generated rich bodies of literature The focus here is a selective exami-nation of the literature that is relevant to our central area of interest: environmentaljustice and equity analysis Omitted from this review is the literature on the socio-logical and political perspectives on the environmental justice movement, which thereader can easily find in the current environmental justice literature

2.1 THEORIES OF JUSTICE AND EQUITY

Theories of justice and equity provide principles and guidelines for deciding whatmakes acts equitable or inequitable Over the past several hundred years, philoso-phers and social scientists have been debating various perspectives on equity andjustice, but have been unable to reach a unified theory of equity There are differentways to classify these perspectives

Young (1994) distinguishes three basic principles of substantive fairness: equaldistribution of resources among all constituents (egalitarianism); distribution ofresources according to each person’s merits or input (proportionality to contribution);

distribution of resources according to some priority principle, such as each person’sneeds (distribution rule).

Howe (1990) made a classification of normative ethical theories, which is helpful

in current discussions of environmental justice She classifies these theories alongtwo dimensions: teleological vs deontological, to act vs to rule The two majorperspectives in the first dimension have been very influential in the debate on equity

or ethics A major distinction between the two perspectives is the goodness andrightness of action The basic principle of the teleological perspective, commonlyreferred to as consequentialism, is that the goodness of the consequences of actiondecides what is the right action In contrast, the deontological perspective focuses

on the rightness of action itself — what we ought to do no matter what

The other dimension distinguishes “the level of application of a theory’s ciples” (Howe 1990:127) In the “rule” case, broad “principles are used to generaterules that, in turn, serve as standards for guiding the behavior of individuals” (Howe1990:127) In the “act” case, principles are used directly to make particular decisions.Wenz (1988) provides an extensive treatment of theories of justice in the envi-ronmental context He examines property and virtue, the libertarian theory, theefficiency theory, human rights, animal rights, the utilitarian theory, and John Rawls’theory of justice In the following sections, we look at four major theories: utilitar-ianism, contractarianism, egalitarianism, and libertarianism

Classical utilitarianism has both strengths and weaknesses It is intuitivelyappealing, quantitative, and “attractively egalitarian.” Its quantitative emphasis pro-vides a common umpire to deal with conflicts of obligations and is particularlyattractive for policy analysis

However, its strengths are also its weaknesses Its quantification techniques arefar from being simple, straightforward, and objective Indeed, they are often toocomplicated to be practical They are also too flexible and subject to manipulation.They are impersonal and lack compassion More importantly, they fail to deal withthe issue of equity and distributive justice

Seemingly, you cannot get fairer than this In calculating benefits and costs, eachperson is counted as one and only one In other words, people are treated equally

For Mill, “justice arises from the principle of utility” (Howe 1990:130) Utilitarianism

is concerned only with the aggregate effect, no matter how the aggregate is distributed.For almost all policies, there is an uneven distribution of benefits and costs Somepeople win, while others lose The Pareto optimality world is almost nonexistent Apolicy’s outcome is Pareto optimal if nobody loses and at least one person gains The Kaldor-Hicks optimality relaxes the Pareto criteria and would justify a policy

if the gainers could potentially compensate the losers (Kaldor 1939; Hicks 1939)

In theory, this seems to be fair and attractive The emphasis on potential, but notrequired compensation, is where various problems start Does the market or thegovernment provide any mechanism for such compensation? Not necessarily If there

is a compensation mechanism, what is a fair compensation? More fundamentally,

is a loss compensable? Some economists would argue that any loss can be sated because compensation transactions happen every day, from compensation fordamage in a car accident to compensation for a life lost in an airplane crash If this

compen-is so, then by simply resorting to those compensation schemes proposed by mists, we would not have such an impasse on waste facility siting issues as we havetoday There is clear evidence that the true cost of hazardous waste facilities isuncompensable (Bacow and Milkey 1982; Weisskopf 1992)

econo-Summers’ proposal, as discussed in the preface, is utilitarianistic Concerningthis proposal, The Economist (1992b:18) stated: “He supposes that the value of alife, or of years of life expectancy, can be measured by an objective observer interms of incomes per head — in other words, that an Englishman’s life is worthmore than the lives of a hundred Indians This is naive utilitarianism reduced to anabsurdity It is so outlandish that even a distinguished economist should see that itprovides no basis for World Bank policy.”

Other than this false assumption, however, The Economist stated that Summers’economics was hard to answer The economic premise underlying Summers’ threearguments is “environmental policy involves trade-offs, and should seek a balancebetween costs and benefits” (The Economist 1992b:18) This balance should deter-mine the “right” non-zero level of pollution, which varies with local circumstances

The Economist believes that for the environmental policy arena, “economic method

— the weighing of costs and benefits — is indispensable.” The Economist furtherargues that because poverty is the greatest cause of mortality in the third world andcleaner growth sometimes means slower growth, which means slower elimination

or mitigation of poverty, “most poor countries will rightly want to tolerate morepollution than rich countries do, in return for more growth So the migration ofindustries, including ‘dirty’ industries, to the third world is indeed desirable.”

If this is a win–win strategy for both developed and developing countries, whyare there as many as ninety countries that prohibit transboundary import of hazardouswastes? If this migration-of-pollution-to-LDCs strategy is indeed desirable in theinternational environmental policy arena, why do developed countries insist on ameaningful participation of developing countries in implementing an internationaltreaty for curbing global warming? Could developed countries solve the globalwarming problem by simply dumping their CO2-generating industries into develop-ing countries? Similarly, could developed countries solve other transboundary envi-ronmental problems such as acid deposition through dumping into their neighbors?

If this economic logic behind dumping on the poor is “impeccable” in theinternational policy arena, it should work similarly in the domestic area The domes-tic counterpart of this logic is to dump pollution into the poorest areas in the country.More specifically, the U.S EPA should, according to this logic, encourage migration

of pollution industries from California and the Northeast to the Appalachia region,the Deep South, and urban areas with large slums, where America’s poorest areconcentrated Why does the EPA bother with regulations about regional transport

of ozone in the eastern United States?

Besides these ridiculous policy implications in the United States and in theworld, the logic underlying Summers’ proposal represents “cultural imperialism,”the capitalist mode of production and consumption, and “a particular kind of polit-ical-economic power and its discriminatory practices” (Harvey 1996:368) Exceptfor its beautiful guise of economic logic, the proposal is nothing new to those familiarwith the history The capitalistic powerhouses in Europe practiced material andcultural imperialism against countries in Africa, America, and Asia for years Theydid it by raising the banner of trade and welfare enhancement They did it throughguns and powder Of course, they had their logic for exporting opium to Canton(Guangzhou) in China through force Now, we see a new logic This time, it iseconomic logic and globalization This time, the end is the same, but the means isnot through guns and powder Instead, it is political-economic power

This example illustrates clearly the danger of using the utilitarian perspective

as the only means for policy analysis Fundamentally, the utilitarian disregards thedistributive justice issue altogether and espouses the current mode of production andconsumption and the political-economic structure, without any attention to the ineq-uity and inequality in the current system Even worse and more subtly, it deliversthe philosophy of “it exists, therefore it’s good.” However, “just because it sells,doesn’t mean we have to worship it” (Peirce 1991)

2.1.2 C ONTRACTARIANISM AND E GALITARIANISM

In A Theory of Justice, Rawls develops a contractarian theory of justice In ahypothetical society, individuals reach a consensus on a social contract that includesbasic institutions and guiding principles for the society to distribute resources.Individuals make their choices “behind a veil of ignorance” that obscures themfrom knowing their abilities, history, and socioeconomic position This veil ofignorance provides incentives for individuals to create a society that is fair to all.Under these conditions, two principles of justice would emerge The first principle

is that “each person is to have an equal right to the most extensive basic libertycompatible with a similar liberty for others.” The second is the well-known maxim

or difference principle: “Social and economic inequalities [of primary goods such

as liberty and opportunity, income and wealth] are to be arranged so that they areboth (a) to the greatest benefit of the least advantaged… (b) attached to offices andpositions open to all under conditions of fair equality of opportunity” (Rawls1971:302) In other words, the least well-off group in society should be made aswell off as possible In the words of Davy (1996), “Justice is what is beneficial tothe poor, or: Minimize pain!”

Contractarianism provides strong moral rules pertaining to the dignity and omy of human beings These rules are particularly concerned with collective goodsand are useful for policy analysts and planners However, they do not provide asingle method akin to cost–benefit analysis for evaluating policy alternatives.Although emphasizing the rightness of an action, contractarianism pays inadequateattention to the consequences of action or policy outcomes The principles and rulesare “impractically extreme and rigid” (Howe 1990:140)

auton-People often confuse contractarianism with egalitarianism Both recognize ing inequity, but they differ in their ultimate end goal The egalitarian has the goal

exist-of eliminating the existing inequality altogether, while the contractarian does nothave such a goal The contractarian would choose an alternative, among manyoptions, that benefits both the poor and the rich, and, as a result, still does not helpreduce any existing inequality Even worse, an action that could exacerbate theexisting inequality would still be acceptable to a contractarian as long as it is to thegreatest benefit of the poor

The egalitarian emphasizes the existing inequality and evaluates any action based

on the degree to which such action can reduce the level of inequality According toSager (1990), Bedau (1967) summarizes egalitarianism as follows:

• All social inequalities are unnecessary and unjustifiable, and ought to beeliminated

• All men are equal — now and forever — in intrinsic value, inherent worth,and essential nature

• The concept of justice involves that of equality

• Social equalities need no special justification, whereas social inequalitiesalways do

• All persons are to be treated alike, except where circumstances requiredifferent treatment

2.1.3 L IBERTARIANISM

Libertarianism emphasizes freedom of individuals People should be able to dowhatever they want in the absence of force or fraud, as long as they respect theequal right of others to do the same (Wenz 1988) Justice results from the freemarket, where individuals make their choices freely In the words of Davy (1996),

“Justice is what is beneficial to the strong: or, Maximize liberty!” Libertarian justice

is illustrated by Friedrich von Hayek’s “catallaxy” (a spontaneous order produced

by the market) and Robert Nozick’s theory of a minimal state: All the state can do

is to prevent aggression and fraud; otherwise, it would violate individual’s rights Contractarianism and libertarianism can be traced to the same root in Kant (Howe1990) Kant, in his Groundwork of the Metaphysic of Morals ([1785] 1964), devel-oped two purely rational criteria for the validity of moral rules The first criterion

is the well-known categorical imperative: “Act only on that maxim through whichyou can at the same time will that it should become a universal law” (Kant [1785]1964:88) The second criterion is the humanity principle: “Act in such a way thatyou always treat humanity, whether in your own person or in the person of any

other, never simply as a means, but always at the same time as an end” (Kant [1785]1964:96) Therefore, Kantian theories emphasize dignity and freedom Rawls’s con-tractarian theories draw on both dignity and freedom, while Nozick’s minimal statetheory relies only on freedom.

Libertarianism stresses the importance of free market, private property right, untary transaction, and free choices This theory provides an underlying rationale forsettling conflicts between individuals such as nuisance and trespass (Wenz 1988).However, when the conflicts involve a large number of people, the libertarian theoryoften fails to provide any just remedy Environmental pollution often involves manypeople, and cannot be solved through voluntary bargaining among individuals Envi-ronmental resources such as air and water are usually collective goods, which oneperson consumes without taking into account costs or benefits for other people thathis/her consumption creates In these cases, market failures often occur A more fun-damental problem with the libertarian theory is the justification for the initial assignment

vol-of property rights One underlying assumption for the libertarian theory is that propertyrights are well and rightfully defined In addition, original acquisition must take placewithout force and fraud This is often not the case; “there are few, if any parts of theearth whose environmental resources have reached their current owners without force

or fraud” (Wenz 1988:75) The libertarian theory “fails to provide adequate underlyingjustification for contemporary property rights and for the view that all issues of justiceshould be decided solely by reference to such rights” (Wenz 1988:77)

2.1.4 W HICH THEORY ?

There is no doubt that policy-makers and planners holding different perspectives ofjustice will make different decisions Figure 2.1 illustrates four hypothetical propos-als with different distribution of net benefits (Beatley 1984) The utilitarian willchoose Proposal I based on the maximum net benefits to the community as a whole.However, this proposal exacerbates the existing inequality Under this proposal, therich get richer, and the poor get poorer Those who emphasize equal share of benefitsand burdens would choose Proposal II The aggregate net benefit to society is smaller

in Proposal II than that in Proposal I, but different income groups share the netbenefit more evenly Proposal II would also deepen existing inequalities, although

to a lesser degree Both proposals are unacceptable to the egalitarian, who seeks tominimize inequalities The egalitarian would choose Proposal III, because it wouldreduce the relative level of inequality to the greatest extent among four proposals.Please note that this proposal has the smallest aggregate net benefit and does notcontribute the greatest benefits among four proposals to low and lower-middleincome groups However, the low and lower-income groups benefit from ProposalIII more than high and upper-middle income groups To maximize the benefit to theleast advantaged group of a society, the Rawlsian would favor Proposal IV, whichgenerates the greatest net benefit among four proposals to the low income group InProposal IV, however, the high income group would benefit the most, and thus thelevel of inequality would be increased

Each of the theories discussed above has its strengths and weaknesses Each one

is powerful and “impeccable” in the eyes of its beholders On the other hand, each

is subject to strong criticism from other camps In fact, Wenz (1988: 310) concludesthat “each theory failed when taken by itself.” Noting the failure in searching for asingular unified theory to deal with a diversity of environmental issues, Wenz (1988)suggests that different theories should be used in different situations Indeed, in acontroversial situation, we often see application of different theories by differentparticipants In the case of waste facility siting (Davy 1996) or lead-paint poisoning(Harvey 1996), different stakeholders use different notions of justice to support theirinterests Landlords and developers use the libertarian view of justice and seekmaximum individual freedoms with respect to their rights invested in their propertiesunder minimal government intervention Residents in a facility-hosting community

or living in houses with lead paint take the contractarian view of justice, layingclaim as (potential) victims of the corporate greed for profit and asking for protectionfrom exposure to environmental risks

Some government officials attempting to act on behalf of the public interestassume a utilitarian view of justice If one takes lead paint as a public health issue

or facility siting as a public policy issue, such officials attempt to balance the benefitsand costs of siting the facility in a community or removing lead paint, therebymaking decisions based on the aggregate net gains to the society as a whole Some environmental justice advocates take an egalitarian perspective They rejectany inequality, whether social, economic, environmental, or political They rejectsiting efforts not by raising the banner of “not-in-my-backyard” but by the principle

of “not-in-anybody’s-backyard.” According to Bullard (1994:206), a pioneer in theenvironmental justice movement, “the solution to unequal environmental protection

FIGURE 2.1 Different theories of justice select different policies (Adapted from Beatley, T., Figure 2, 22 J Am Planning Assoc 50, 4, 22, 1984 With permission.)

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-is seen to lie in the struggle for justice for all Americans No community, rich orpoor, black or white, should be allowed to become an ecological ‘sacrifice zone.’”

It is no wonder that different stakeholders speak different languages in suchconflicts Numerous failures in the waste facility siting efforts lead some observers

to conclude that the conflict due to these different perspectives of justice is cilable Davy (1996) argues that in this pluralist world of justice concepts, adoption

irrecon-of any justice concept will be seen as unjust or unfair to somebody with a differentjustice concept Any siting will be unjust or unfair to somebody He labels thisphenomenon as “essential injustice.” From a philosophical point of view, the conflict

of different perspectives of justice is also irreconcilable, with some qualifications(Howe 1990) Which principle of justice prevails in such an irreconcilable conflict?Harvey (1996) argues that it is a “class struggle.” He quotes Marx as saying “Betweenequal rights, force decides.”

What should a policy analyst or any individual do in the pluralist world of justiceconcepts? An analyst can choose a perspective according to a specific situation(Wenz 1988) or a role he or she holds (Held 1984) This situation-specific strategy

is not without difficulty A lack of available criteria for choosing one perspectiveover the other creates a flexible situation where any choice may be subject to “acts

of power” (Harvey 1996)

Some argue that a policy analyst should apply multiple perspectives to a policyissue and analyze the conflicts involved from different angles (Anderson 1979;Moore 1981) This enables the analyst to offer public officials a multi-facetedanalysis of the strengths and weaknesses of each perspective This information isparticularly useful to search for “policies that move most surely in the direction ofcommonweal” (Moore 1981:14) In the case of facility siting, Davy (1996) arguesfor “a fair balance between different justices,” and for eliminating and avoidinginjustice to the extent possible

Justice to whom? In the policy or planning domain, groups of people that sharecommon interests and concerns are often the subject of inquiry for justice Inphilosophy, however, the focus is on the individual In measuring equity concerninggroups, disproportionality is often used and equated with inequity or injustice Perhac(1999), a philosopher, argues that three major theories of justice — utilitarianism,natural rights theory, and (Rawlsian) contractarianism — do not call for “eliminatingdisproportionality along racial or socioeconomic lines” as a matter of justice Pro-portionality of risk distribution along racial or socioeconomic lines does not ensurejustice to individuals He suggests a shift of focus from racial or socioeconomicgroups to individuals at greatest risk irrespective of their group association However,

in the current political environment, it is not individuals but rather groups that playmajor roles

2.2 ECONOMIC AND LOCATION THEORIES

Efficiency is what economists worship When they talk about efficiency, what theyusually mean is Pareto efficiency It is a state in which no one can be made betteroff without making someone else worse off An economy is Pareto efficient if thereare “no unexploited gains to trade, no unexploited way of increasing output with

the same level of inputs,” and no mix of products that do not reflect the preferences

of consumers (Stiglitz 1993) These very strong conditions for the Pareto efficiency

of the market economy are referred to, respectively, as exchange efficiency, tion efficiency, and product-mix efficiency A competitive market is Pareto efficient,and every Pareto-efficient allocation can be obtained through the market mechanism

produc-A competive market also has strong assumptions: rational participants, perfect mation, utility- or profit-maximization, and non-existence of market failure condi-tions In the real world, these conditions are seldom realistic Many environmentalissues have defied all these conditions

infor-2.2.1 E XTERNALITY AND P UBLIC G OODS

An externality arises when one individual’s activity imposes costs or benefits onother unrelated parties, but this individual does not take into account these externaleffects when making his or her decision As a result, there is a divergence betweensocial costs and private costs, which indicates economic inefficiency In order toachieve efficiency, such government policies as taxation and subsidy are justified(Pigou 1926) On the other hand, Coase (1960) argued that such government inter-vention was unnecessary The well-known Coase theorem states that if propertyrights are well defined and freely transferable in a world of zero transaction cost, avoluntary bargaining and compensation solution among different users of the envi-ronment will result in a Pareto-optimal allocation, and properties will go to theirmost socially valued uses Coase argued further that victims of environmental pol-lution should not only be not compensated but also be taxed, for victims’ decisions

to locate near the polluter impose an external cost or an increase in damages incurred

by the polluter’s activity The Coase theorem has been criticized on many grounds,including the impracticality of bargaining in real world situations involving a largenumber of parties, relevance of transaction costs, and equity considerations (Baumoland Oates, 1988) In particular, environmental quality is a public good Public goodsare goods for which one person’s consumption does not affect another’s (nonrival-rous), and it is extremely costly to exclude anyone from enjoying (nonexcludable)

In the case of public goods, an individual can take the position of a freerider andnever pay the cost for using them

From economic theories, Hamilton (1995) derives three hypotheses for ing why exposure to environmental risks might vary by race: pure discrimination,the Coase theorem (differences in willingness to pay), and the theory of collectiveaction (differences in propensity to engage in collective action) In the pure discrim-ination model, owners of environmentally risky facilities increase their utility bysiting their facilities in the communities with the racial groups against which theyhave prejudice Interpreting the Coase theorem in the context of siting a hazardouswaste facility, he indicates that this type of facility will locate where compensationdue to damages is the least Furthermore, compensation is associated with thecharacteristics of the host community, such as population affected, income, propertyvalues, and residents’ willingness to pay for an environmental amenity In turn, thesevariables may be associated with race As discussed above, voluntary negotiationsfor compensation may be impossible in real world situations More often, residents

explain-in a target community voice their concern and compensation demands through thepolitical process To the extent that different racial and income groups have differentpropensities for political participation, the location of the environmentally riskyfacilities may be associated with the race and income characteristics of the hostcommunity In examining capacity expansion decisions of commercial hazardouswaste facilities during the period from 1987 to1992 by using population data at theZIP code level, Hamilton (1995) found that collective action, measured in terms ofactual voter turnout in a county, offered the best explanation for which neighborhoodswere selected for capacity expansion After controlling for other variables, thepercentage of nonwhite population was not statistically significant.

Ordinary consumer’s surplus, also called Marshallian consumer’s surplus, is awelfare measure and is simply defined as the difference between the price whichthe consumer is willing to pay and the actual price he or she pays It measures thesurplus of satisfaction that is derived from the consumer’s paying a lower price thanhis or her maximum willingness to pay This interpretation is very intuitive However,the Marshallian consumer’s surplus measure does not offer much help for quantifyingwelfare changes associated with public policies It does not measure either utilitychanges, except for some special cases, or gains or losses of potential compensation.Following Freeman (1993), let us look at four other welfare measures: compensatingvariation, equivalent variation, compensating surplus, and equivalent surplus Compensating variation measures the compensating payment that is required tomake a consumer indifferent to his or her original consumption bundle at the oldprice and new consumption bundle at the new price The consumer’s initial utility isthe reference point; that is, the consumer should be as happy as he or she is now inthe face of proposed changes in price This measure implies that the consumer hasthe right to the status quo If a proposed policy increases the price for the consumerand thus decreases his or her utility, the consumer has to be compensated with acertain income to maintain his or her original utility level For a price increase,compensating variation is the minimum amount that the consumer is willing to accept(WAC) to prevent a utility decrease On the other hand, if a proposed policy decreasesthe price for the consumer and thus would increase his or her utility, the consumerwould be willing to pay a certain amount to purchase at the new price level Themaximum amount that the consumer would be willing to pay is where he or she stillmaintains his or her original utility level and thus exhausts any potential welfare gain.For a price decrease, compensating variation is the consumer’s maximum willingness

to pay (WTP) for consuming at the new price Essentially, compensating variation isthe income change required to maintain the status quo when prices change

Equivalent variation measures the income change that would cause the sumer’s utility to change at the same amount as the change in the price Theconsumer’s final utility is the reference point; that is, we should make the consumer

con-as happy con-as he or she will be when price changes occur This implies that theconsumer has the right to the change If a proposed policy decreases price and thusincreases his or her utility, the consumer would be better off and the consumer wouldhave to be paid to forgo the opportunity for potential welfare gain For a pricedecrease, equivalent variation is the minimum payment that the consumer would bewilling to accept (WAC) to forgo the opportunity to consume at the new low price.For a price increase, it is the maximum amount that the consumer would be willing

to pay to avoid the price increase Basically, equivalent variation is the incomechange required to reach or avoid the final utility in the future when prices change When prices change, consumers will adjust their consumption behaviors, includ-ing the quantity they will consume These changes are reflected in compensatingand equivalent variation measures In contrast, the compensating and equivalentsurplus measures for price changes hold the consumption at the specified level.Compensating surplus measures the compensating payment that is required to keepthe consumer at the original utility level and maintain the consumption quantity atthe new level that would be purchased at the new price For a price decrease,compensating surplus is the consumer’s WTP to consume the new quantity at thenew price The way this differs from compensating variation is that the consumer

is not allowed to consume other than the fixed quantity at the new price

Equivalent surplus measures the income change that would be required to holdthe consumption quantity at the original level, but change the consumer’s utility tothe new level associated with a price change For a price decrease, equivalent surplus

is the minimum payment that the consumer would be willing to accept (WAC) toforgo the opportunity to consume at the new low price The difference betweenequivalent variation and equivalent surplus is that equivalent surplus has a fixedquantity of consumption at the original level

Earlier in the section on utilitarianism, we discussed Pareto optimality andKaldor-Hicks optimality These are two social welfare criteria that are used toevaluate alternative public policies Because a policy that makes no one worse offand at least one person better off is non-existent, the Pareto criterion is too restrictive

to be useful in any policy evaluation The Kaldor-Hicks criteria are concerned withthe potential Pareto improvement at the aggregate level The criteria are twofold.First, if all of the winners can potentially compensate all of the losers from a proposedpolicy, then the Kaldor version of the criterion is satisfied (Kaldor 1939) In theframework of the welfare measures discussed above, this is the condition wherebythe sum of compensating variation or compensating surplus measures for all indi-viduals is positive Second, all losers from a proposed policy could potentiallycompensate the winners so that the proposed policy can be forgone This Hicks test

is satisfied if the sum of all winners’ equivalent variations is greater than the sum

of all losers’ equivalent variations

While these two criteria are efficiency criteria of welfare economics, they donot address the equity issue Subsequent modifications of the Kaldor-Hicks criteriaintroduce the equity dimension and address the question of whether the proposed

policy improves the distribution of income One such approach utilizes the socialwelfare weighting function, which introduces different weights to different individ-uals for their welfare changes The rich may be given a low weight, while the poormay be given a high weight The key issue is how we can appropriately determinethe weights to different individuals or groups One may design the weighting function

in such a manner that policy proposals would redistribute income toward the poor

so as to reduce the existing inequality This explicit consideration of equity willjustify policy alternatives that would result in negative aggregate welfare changes,which are not possible under the Pareto or Kaldor-Hicks criteria (Freeman 1993)

2.2.3 R ESIDENTIAL L OCATION T HEORY

Studies that focus on how human activities consume space as a limited resource fallunder a variety of labels, including spatial economics, regional science, urban andregional studies, urban economic theory, location theory, and economic geography.Spatial economics addresses two principal questions: “how economic agents ofvarious types choose their locations in a spatially extensive economy, and how themarket areas of these agents are determined” (Norman 1993) Agents include, amongothers, residents who choose a residence, industries that select a site for manufac-turing, commercial sectors that decide where to provide their services to consumers,and government agents who determine the locations for public services

The seminal and a monumental contribution to location theory is attributed tovon Thünen (1826), who developed a theory of agricultural land use Land within

an urban area is allocated according to the rents that the competing users are ableand willing to bid In von Thünen’s world of a homogeneous, featureless plaincontaining a single town at its center in which only manufactured goods are pro-duced, an urban form emerges which has a concentric ring pattern of land use with

a declining gradient of bid rents from the center

After more than a century’s neglect, von Thünen’s theory has been revived sincethe end of World War II Alonso (1964) generalized von Thünen’s central concept ofbid rent curves to an urban context Locational choice of the household was initiallyseen as a problem of trade-off between accessibility and space Under assumptionssimilar to von Thünen’s, a monocentric residential distribution pattern arises in anurban space where households with higher income locate further away from the centralbusiness district (CBD) than those with lower income, ceteris paribus Later develop-ment along this line introduced such locational factors as the time cost of commuting,family structure, and housing consumption, and produced more realistic spatial patterns

of residential location According to Fujita (1989:42), “Wage-poor and wage-richhouseholds with few dependents (such as singles and working couples with fewchildren) will tend to reside close to the city center Beyond them and out toward thesuburbs, middle-income households with large families and few commuters will befound Farther away, asset-rich households with larger families and few commuterswill locate.” Furthermore, the competitive land market is proven to lead to a uniqueequilibrium of residential land use, which is socially efficient

More recent developments have incorporated externality into residential tion decisions; namely, in making a residential choice, households weigh three