- Michael from Highland Park -
The simple answer to your question is, "Not quite", but first a couple of basic concepts:
1. Truly new products in a marketplace almost always cost more than existing products. Although you can get a DVD player for as little as $20 these days, Blu-Ray players are more expensive.
2. Established marketplaces favor incumbents. With consumer familiarity, established regulation, and entrenched financing (as well as legal and advertising infrastructure), existing technologies have considerable advantage.
3. The "rational consumer" attempts to get the most utility for their available resources, and does not stockpile or starve unless placed in dire circumstances.
The point your challenger does get right is that in the classic definition of utility, you are choosing to purchase a product at a price point that gives you less of what you "need" for the dollar spent. In that way, you are acting "irrationally". That said, people do this all the time. A person with a family of four needs only to purchase a car at $15,000, but they regularly purchase vehicles at twice to three times that amount based upon the perceived value they get from the purchase. Factors such as safety, comfort, or status have no economic value (unlike reliability and fuel economy which can be perceived as rational decisions), yet form the basis for paying more. The greatest utility for dining out comes from fast food (both non-healthy and healthy) yet people frequent restaurants of various prices all the time based upon food quality, ambiance, or fashion. Buying things that cost more, in and of itself, is not an irrational behavior in the real marketplace, but it helps to examine your motivations.
Quality
Many people choose green products because of the real and perceived quality. Home items that have no or fewer chemicals make some people more comfortable about using them. People purchase food products with no added chemicals or those that are prepared on site (such as baked goods) because they want items similar to those they might make from scratch. Some consumers place their money in banks that they know make a higher percentage of loans to local businesses because they want their money to circulate in their local community to keep property values high. None of these decisions will always result in the best economic choice, but will provide value to the consumer in the same way we discussed earlier.
Status
Some people have joined the "green movement" to be a part of something. For any number of personal motivations, they want to be a part of something so they buy the Prius, join a CSA, or put a "buy local" sticker in their window. Even though "fashion" has led to some poor decisions as a society, it can also feed into the good. In this case, people having a sense that although they do not totally get the issues, they see making green choices as the "hip" thing to do does not take away from the value of the decision, or even from the state of rationality of the consumer. Fad purchases have been a part of our economy for decades (if not centuries). If we eliminate them as irrational, we would have to change entire industries.
Externalities
Then, there are those consumers who make the "irrational" choice to include the price of externalities into their purchasing decisions. Externalities are costs associated with a product that do not get reflected in the price of the product. For example, the price of cigarettes did not used to include any cost of the impact of second-hand smoke on those who did not smoke. In theory, the person choosing to smoke would accept the cost of paying for medical care for themselves, but the cost of treating those who did not choose to smoke would be born by society or the people themselves. Many industries have these sorts of externalities: agribusiness has stream pollution and antibiotics, electricity has coal pollution and nuclear waste, and vehicles have road construction and smog. A consumer who chooses to pay the "full price" for a green product may do so because they know that it is better than the "full price" for the non-green alternative, even if the full economic benefit does not come to them directly (meaning they still might have to contribute to the funding of the externalities).
No matter what your reason for making your choices, choosing to buy the way you do helps to overcome the first two issues noted at the top of this post. Every new business needs people who are willing to pay a little more for the new or different technology. The iPhone significantly increased the price of a mobile phone, but the technophiles who wanted the latest technology bought in. By purchasing the product, you help to increase the marketplace, which will either move the incumbent players to change their approach, or will eventually make their products the higher priced. This happens as either we identify the externalities and build the cost in, or as investors see the value of the new idea and fund the increased scale. In any way, none of your decisions is really charity. You still expect quality, value and utility from your decision, you just have a more rational view on how your decisions affect others, and you have made the choice to accept the economic consequence.
Next time, ask your friend if he has ever seen a CAFO when he tells you about his inexpensive meat.
No comments:
Post a Comment