Consumption And Decision-Making Part 2

Figure 4.5 Ecological Footprint per Capita, Select Countries, 2016 5.2 GREEN CONSUMERISM Green consumerism means making consumption decisions at least partly on the basis of environmental criteria. Clearly, green consumerism is increasing: more people are recycling, using reusable shopping bags and water containers, buying hybrid or electric cars, and so on. Yet some people see green consumerism as an oxymoron—that the culture of consumerism is simply incompatible with environmental sustainability. green consumerism: making consumption decisions at least partly on the basis of environmental criteria Green consumerism comes in two basic types: 1. “Shallow” green consumerism: consumers seek to purchase “ecofriendly” alternatives but do not necessarily change their overall level of consumption 2. “Deep” green consumerism: consumers seek to purchase ecofriendly alternatives but also, more importantly, seek to reduce their overall level of consumption Someone who adheres to shallow green consumerism might buy a hybrid or electric car instead of a car with a gasoline engine or a shirt made with organic cotton instead of cotton grown with the use of chemical pesticides. But those practicing deep green consumerism would, when feasible, take public transportation instead of buying a car and question whether they really need another shirt. In other words, in shallow green consumerism, the emphasis is on substitution, while in deep green consumerism, the emphasis is on a reduction in consumption. Ecolabeling helps consumers make environmentally conscious decisions. An ecolabel can provide summary information about environmental impacts. For example, stickers on new cars in the United States rate the vehicle’s smog emissions on a scale from one to ten. Ecolabels are placed on products that meet certain certification standards. One example is the U.S. Environmental Protection Agency’s Energy Star program, which certifies products that are highly energy efficient. ecolabeling: product labels that provide information about environmental impacts or indicate certification In addition to environmental awareness by consumers, many businesses are seeking to reduce the environmental impacts of their production processes. Of course, some of the motivation may be to increase profits or improve public relations, but companies are also becoming more transparent about their environmental impacts. The Global Reporting Initiative (GRI) is a nonprofit organization that promotes a standardized approach to environmental impact reporting. In 2017, 82 percent of the world’s 250 largest corporations used the GRI methodology, including CocaCola, Wal-Mart, Apple, and Verizon. Discussion Questions 1. Think about one product you have purchased recently and list the environmental impacts of this product, considering the production, consumption, and eventual disposal of it. What steps do you think could be taken to reduce the environmental impacts associated with this product? 2. Do you think that green consumerism is an oxymoron? Do you think that your own consumer behaviors are environmentally sustainable? Why or why not? 6. POLICY INFERENCES FROM OUR MODEL OF CONSUMER BEHAVIOR If one assumes that individuals always have perfect information and that they use that information to make the best choice, then one tends to see little role for government. For example, why would we require consumer protection law if consumers know the full consequences of buying something and always choose well? The model of economic behavior presented in this chapter, however, indicates that economic actors often do not behave rationally or have complete information and stable preferences. Their behavior is often significantly influenced by various contextual factors. Adopting a contextual model of behavior justifies the need for a more active role of government policy in affecting market outcomes. 6.1 PREDICTABLE IRRATIONALITY AND NUDGES It is important to realize that while economic behavior is often irrational, it is not random. Deviations from “optimal” behavior are typically in a specific direction. For example, most people irrationally under-save for retirement rather than over-save. People tend to place too little value on the future and tend to eat foods that aren’t healthy enough. A leading behavioral economist Dan Ariely notes that rationality is the exception rather than rule: We are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.35 So if people continually make mistakes in the same direction, how can policies be devised to help them make “better” decisions? One answer comes from the 2008 book Nudge, by Richard Thaler and Cass Sunstein.36 They advocate for policy “nudges” that encourage, but don’t force, people to make certain decisions—an approach they refer to as libertarian paternalism. While they recognize that these two terms may seem unappealing and contradictory, they argue that the libertarian aspect of their strategies lies in the insistence that policies should be designed to maintain or increase freedom of choice. The paternalism aspect lies in the claim that it is desirable to design policies and present choices to motivate people to make better choices. libertarian paternalism: the policy approach advocated in the 2008 book Nudge, where people remain free to make their own choices but are nudged toward specific choices by the way policies are designed and choices are presented Thaler and Sunstein provide numerous examples in their book related to decisions about health, financial management, education, and the environment. Take the problem of insufficient saving for retirement. They note that many people intend to increase the amount they save for retirement but never get around to it. Recognizing this, the book describes the “Save More Tomorrow” idea, where workers enroll in a program that automatically increases the percent of their income that is set aside for their retirement each time they get a raise. As increased saving is timed to correspond with pay raises, workers don’t see their take-home pay go down. Workers enrolled in the program can opt out of it any time, but most don’t. Evidence shows that the program is very effective. In one case, implementation of this program increased workers’ retirement savings from an average of 3.5 percent of their income to 13.6 percent in four years. Take another example—how to get people to reduce their home energy use. An experiment in California gave some residents a small electronic ball that would glow red when energy usage exceeded a given level but glowed green with moderate usage. The results showed that the ball led to energy use reductions of 40 percent during peak-use periods, while text and e-mail notifications were ineffective. The key seems to be that the ball makes one’s energy use more visible and provides an “anchor” for decision-making about energy use. Governments around the world are increasingly devising policies based on the findings of behavioral economics, nudging people to make better decisions. For example, in 2007, New Zealand implemented the KiwiSaver program, which automatically enrolls workers in a national savings plan for retirement, with a default contribution of 3 percent. Workers have the freedom to opt out or choose a higher contribution rate. In 2010, the government of the United Kingdom set up the Behavioral Insights Team, commonly known as the “Nudge Unit,” with the objectives of “improving outcomes by introducing a more realistic model of human behaviour to policy” and “enabling people to make ‘better choices for themselves’.”37 One of the issues studied by the Nudge Unit has been ways to reduce rates of tax evasion.38 To encourage people to pay their taxes on time, they experimented with various versions of a reminder letter sent to people who hadn’t yet paid their taxes. Making the letter as simple as possible did not significantly affect response rates. However, response rates nearly doubled when people were reminded of social norms such as “9 out of 10 people pay their taxes on time.” This illustrates that people’s behavior can be influenced when they are nudged to think of themselves in comparison to others. As another example, government officials in Bogotá, Colombia, initially responded to a water shortage by sending residents information about the crisis and asking them to reduce their usage. Not only was the appeal ineffective, water consumption actually increased as many people began stockpiling water. The government then changed its strategy, trying to make water conservation a new social norm. They distributed free stickers with water conservation messages, to be placed on faucets at offices and schools. Households with exceptional water savings were presented with small awards and praised in the local media. This latter strategy proved to be much more effective. 6.2 CONSUMPTION AND PUBLIC POLICY While government regulations could help address the problem of overconsumption to an extent, some people may argue that government intrusion into personal consumption decisions is unwarranted. But current government regulations already influence consumer decisions—for instance, high taxes on products such as tobacco and alcohol discourage their consumption to some extent. On the other hand, subsidies are often used to increase the demand for certain products. Buyers of new electric vehicles in the United States may be eligible to receive a $7,500 federal tax credit, a subsidy that reduces the environmental externalities of transportation and encourages a shift away from fossil fuels. Taxes and subsidies can be justified for several reasons, including as a response to externalities or to achieve some social goal. Thoughtful regulations can encourage people to make choices that better align with social and personal well-being. We now consider a range of different policy ideas for responding to concerns about overconsumption. Flexible Work Hours One specific policy to reduce the pressure toward consumerism is to allow for more flexibility in working hours. Current employment norms, particularly in the United States, create a strong incentive for full-time employment. Employees typically have the option of seeking either a fulltime job, with decent pay and fringe benefits, or a part-time job with lower hourly pay and perhaps no benefits at all. Thus, even those who would prefer to work less than full-time and make a somewhat lower salary, say, in order to spend more time with their family, in school, or in other activities, may feel the imperative to seek full-time employment. With a full-time job, working longer hours with higher stress, one may be more likely to engage in “retail therapy” as compensation. Europe is leading the way in instituting policies that allow flexible working arrangements. Legislation in Germany and the Netherlands gives workers the right to reduce their work hours, with a comparable reduction in pay. Sweden and Norway give parents the right to work part-time when their children are young. Such policies encourage “time affluence” instead of material affluence. Juliet Schor argues that policies to allow for shorter work hours are also one of the most effective ways to address environmental problems such as climate change.39 Those who voluntarily decide to work shorter hours will be likely to consume less and thus have a smaller ecological footprint. Advertising Regulations Another policy approach to discourage overconsumption is to focus on advertising regulations. Government regulations in most countries already restrict the content and types of ads that are allowed, such as the prohibition of cigarette advertising on television in the United States. Additional regulations could expand truth-in-advertising laws, ensuring that all claims made in ads are valid. For example, laws in the United States already restrict what foods can be labeled “low fat” or “organic.” Again, European regulations are leading the way with stricter advertising regulations, especially for children. For example, Norway has banned all advertising targeted at children under 12 years old. Regulations in Germany and Belgium prohibit commercials during children’s TV shows. At least eight countries, including India, Mexico, France, and Japan, have instituted policies to limit children’s exposure to junk food ads. Another option is to change the tax regulations regarding advertising expenditures. In the United States, companies are generally able to treat all advertising costs as tax-exempt business expenses. Restricting the amount of this tax deduction (or eliminating the deduction entirely) would create an incentive for companies to reduce their advertising. Consumption Taxation One of the ways to reduce the extent of any activity is to tax it. Taxes on foods considered unhealthy are increasingly common. For example, taxes on sugary drinks have been implemented in several countries, including France, Mexico, and Hungary. Other taxes can target specific luxury items that are seen as representing conspicuous consumption—consumption primarily for the display of high economic status. For example, from 1992 to 2002, the United States imposed luxury taxes on new automobiles that cost more than $30,000. Rather than classifying particular goods and services as luxuries, some economists prefer broader tax reforms. In his 2001 book Luxury Fever, Robert Frank proposes replacing the current emphasis in the United States on taxing income with taxes on consumption. Under his proposal, the tax on a household would be determined by the amount it spends each year. A certain amount of spending would be exempt from taxation so that low-income households would be exempt from the tax—Frank suggests $30,000 per family. Beyond that, consumption would be taxed at successively higher rates. For example, while the first $30,000 of spending would be nontaxable, he suggests that the next $40,000 of spending be taxed at a 20 percent rate. Then the next $10,000 of spending might be taxed at a 22 percent rate. In his example, consumption tax rates on spending above $500,000 rise to 70 percent. He argues that such high tax rates on conspicuous consumption are necessary “to curb the waste that springs from excessive spending on conspicuous consumption.”40 Frank notes that both conservatives and liberals have expressed support for a shift from taxation of income to taxation of consumption, although they disagree on the details. Frank argues that exempting all savings from taxation would increase savings rates, which he suggests is reason enough for the shift. But the main objective would be to reduce the pressures toward consumerism and promote well-being. Discussion Questions 1. Do you believe that the government has a right to influence or otherwise interfere in consumer decisions? What additional policies, if any, do you think are needed regarding consumer behaviors? 2. What do you think about libertarian paternalism as a way to guide policies? Do you think there are any problems with this approach? REVIEW QUESTIONS 1. Is it accurate to describe Adam Smith as an uncritical champion of selfish behavior? 2. What are some of the key assumptions of the neoclassical model? 3. What is consumer sovereignty? 4. What is a budget line? How can we show one on a graph? 5. How does a budget line change when one’s income changes? 6. How does a budget line change when the price of one of the items changes? 7. What is a utility function? How can we represent one on a graph? 8. What is marginal utility? 9. What is diminishing marginal utility? What does it imply about the shape of a utility function? 10. What are some of the limitations of the neoclassical consumer model? 11. What is behavioral economics? 12. What is the availability heuristic? 13. How can “framing” affect decision-making? 14. What is the anchoring effect? 15. What is the difference between a high and low time discount rate? 16. Does the evidence suggest that people should always make economic decisions without relying upon their emotions? 17. Does empirical evidence indicate that people act only out of self-interest? 18. What are some of the insights from neuroeconomics? 19. Explain the concept of bounded rationality. 20. Summarize the model of economic behavior in contextual economics. 21. What is the difference between absolute and relative deprivation? 22. What are reference and aspirational groups? 23. What is voluntary simplicity? 24. What is the ecological footprint approach to quantifying environmental impacts? What are some of the findings of ecological footprint research? 25. What is green consumerism? What is the difference between “deep” and “shallow” green consumerism? 26. What are the policy implications of behavioral economics? 27. What are some policy examples of “nudges”? 28. How can flexible work-hour policies reduce excessive consumerism? 29. How would consumption taxation work? EXERCISES 1. Monica plans to spend her income on concert tickets and movie tickets. Suppose that she has an income of $100. The price of a concert ticket is $20, and the price of a movie ticket is $10. a. Draw, and carefully label, a budget line diagram illustrating the consumption combinations that she can afford. b. Can she afford 6 movie tickets and 1 concert ticket? Label this point on your graph. c. Can she afford 2 movie tickets and 6 concert tickets? Label this point on your graph. d. Can she afford 4 movie tickets and 3 concert tickets? Label this point on your graph. e. Which of the combinations mentioned just uses up all her income? 2. Continuing from the previous exercise, suppose that Monica’s income rises to $120. Add her new budget line to the previous graph. 3. Next, suppose that Monica’s income stays at $100, but the price of concert tickets drops from $20 to $12.50 each. a. Draw and carefully label both her original and her new budget lines. b. Can she afford 2 movie tickets and 6 concert tickets after the price drop? 4. Suppose that Antonio’s total utility from different quantities of snacks per day is given by the table subsequently. Quantity of snacks per day Total utility Marginal utility 0 0 1 20 2 40 3 60 4 75 5 85 6 90 7 85 8 75 a. Draw and label Antonio’s utility function for snacks. b. Fill in the last column of the previous table, calculating Antonio’s marginal utility from snacks. c. Does Antonio always display diminishing marginal utility in his satisfaction from snacks? d. Assuming Antonio is rational, what is the maximum number of snacks that he could choose to consume per day? 5. Various U.S. government agencies, among them the Food and Drug Administration (FDA) and the Environmental Protection Agency (EPA), include “consumer protection” as one of their goals. The FDA, for example, decides whether drugs that pharmaceutical companies want to sell are safe and effective, and the EPA decides whether particular pesticides are safe for consumer use. Some people believe that such government oversight unnecessarily interferes with companies’ freedom to sell their goods and with consumers’ freedom to buy what they want. Indicate how you think each of the following individuals would evaluate consumer protection policies, in general. a. Someone who believes strongly in consumer sovereignty b. Someone who believes strongly that consumers make rational choices a. b. c. d. e. f. g. h. i. j. c. Someone who believes that consumers sometimes have less than perfect information about what they are buying d. One who believes that consumers can be overly influenced by marketing campaigns 6. Which of the following is consistent with the view of human behavior as purely selfinterested? Which may indicate broader motivations? a. Michael sells his car on eBay. b. Jane joins a community clean-up group. c. Ramon studies to become a doctor. d. Joe buys a birthday present for his daughter. e. Susan buys a new pair of shoes for herself. 7. Consider the process of applying to college and choosing a college to attend if admitted. Would you say that this process involves: a. Maximizing behavior b. Satisficing behavior c. Meliorating behavior d. Bounded rationality Could it involve a combination of them? Could this differ from person to person? 8. How does time discounting affect your own decision-making? Do you do things today with a view toward future benefits, or do you look mainly for short-term satisfaction? Does your time discount rate differ in different areas of your life? 9. Consider a rational, profit-maximizing business firm. What motivations might the firm have that are not directly related to making a profit? For example, what if the firm made a donation to a community organization or voluntarily cleaned up pollution resulting from its production process? Why might it do this? How about if it offered employees a good health-care plan or subsidized day care? Are these actions all ultimately directed at making more profit, or could there be something else involved? 10. Match each concept in Column A with an example in Column B. Column A Column B Self-interest 1. Finding a restaurant that is close by and has food that is “good enough” Altruism 2. You start getting bored after watching your third TV show in a row Satisficing 3. You decide that you have enough clothing and do not need any more Availability heuristic 4. Looking for a job that’s better than your current job Deep green consumerism 5. You buy clothing made with organic cotton instead of cotton produced with pesticides Utility maximizing 6. Choosing a college because your older brother or sister went there and really recommends it Optimizing 7. How households act in the neoclassical model Diminishing marginal utility 8. Seeking the highest-paying job possible Shallow green consumerism 9. Volunteering at a homeless shelter Meliorating 10. Carefully examining all available automobile models to select the one that is best for you