Externalities

Consumers Can Understand Environmental Externalities & Do Something About It

Consumers make purchasing decisions that represent 70% of the economy in the US and about 60% globally.

Consumers pay a price for the products and services they buy and a market economy implies price competition. From Marketing 101, “price” is one of the 4 basic Ps of marketing “price, product, place and promotion” (there are others, perhaps as many as 14). For similar products sold in the same store (place) price and promotion make all the difference according to the old thinking.

From a producers perspective, price is a function of costs and expected profits (the ultimate corporate P). But, are all the costs passed on to the consumer in the price of the product? Not if you count the externalities;

Externalities: Prices Do Not Capture All Costs

Negative and positive externalities

In the case of pollution—the traditional example of a negative environmental externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a home owner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.

This Khan Academy video can be called Externalities 101.

In an ideal market economy, all externalities would be included in the price of a product. But accounting for the costs of environmental externalities is not trivial. If you have any doubts download this UC Berkeley lecture PowerPoint.

To achieve a sustainable economy, externalities have to be accounted for somehow. Current approaches involve internalizing externalities, sustainability accounting and taxes on environmental externalities (such as the Carbon Tax). All these approaches are “top down” to be carried by corporations and/or governments.

Is there a bottom up approach? We believe so.

Consumers are ready to make sustainability a major factor in their decisions as indicated by the latest studies.

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The above slide is courtesy of Sustainable Brands, an association sponsored by the corporate sustainability movement. We welcome the new awareness that corporations seem to have gained about the need to engage consumers to acheive a sustainable economy. We wrote about the need for corporate, community and consumer based sustainability to work together.

Communities pulling together to move towards sustainability is absolutely necessary. Installing renewable energy sources, recycling, local farming and energy efficient transportation are all trends that are gaining momentum and making a difference.

The corporate approach to engage consumers involves educating consumers about corporate sustainability policies and efforts. Corporations understand that consumers will factor sustainability in their selection of products and brands. They also hope that a combination of “branding” and ecolabels will convince consumers about which products to buy. From the Sustainable Brands page;

The research found a big majority of the world’s consumers laid the responsibility of solving the global environmental crisis at the door of businesses. In addition, consumers better trusted companies’ environmental claims when they were backed up by certification marks indicating ingredients and input products were responsibly sourced.

But, can corporations be expected to account for the environmental externalities of their products and services. What incentives do they have if profits are their one and only priority?

The approach we propose is to empower consumers by providing them with information about the environmental and workplace justice (externalities) of products with full transparency through the Internet via an app and a web site. We plan to launch EarthTouch in 2015. EarthTouch will also allow consumers to highlight information about different issues by specifying their priorities (climate change, GMOs, animal cruelty, child labor, recycling, etc.) and to feed back their concerns to manufacturers.

Certainly we cannot expect one single consumer to be all knowing, but millions of well informed consumers can and will make a huge difference. A dynamic related to the wisdom of the crowd.

The key concept is “well informed”. If this information is not trusted or if it is difficult to obtain and understand this consumer empowerment will not happen. For this we propose the first ever information cooperative, the Alliance for Consumer Empowerment and Sustainability .

Perhaps now our Earth Accounting name becomes more obvious. We intend to account for the externalities of consumption on planet Earth, deliver this information to consumers and allow them to play a leading role towards a sustainable economy. We are also a benefit corporation, profits are not our #1 priority.

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