Is More Really Better? Consumption and Welfare

Introduction  Is “overconsumption” possible? 1. In the IPAT equation (Chapter 7) Environmental Impact = Population * Affluence * Technology 2. If more is not really better (This chapter)

More is Better?  If material gain in fact does not lead to greater happiness, then efficient outcomes do not really increase welfare This means benefit-cost analysis loses much of its force and safety or sustainability goals make more sense This also means that society is “overconsuming” resources

Money and Happiness

Easterlin Paradox:  Money buys very little happiness, and it does so at a decreasing rate  The poorest people in a nation are only a bit less happy than the richest:  % “very happy” ○ About 1 in 5 poor people ○ Just over 1 in 4 rich people

Social Norms and Consumption Bandwagon effect: ○ A desire to consume something because others are as well Snob effect: ○ the desire to do or consume something because others aren’t Veblen effect (a type of Snob Effect): ○ “Conspicuous consumption”

Explaining the paradox 1. Social motives for consumption and the “rat race”. 2. Increasing importance of positional goods.

Getting Ahead  Survey research reveals that People who have recently gotten richer are much more satisfied than people who have recently gotten poorer  Exceeding consumption norms and personal expectations appears to be the material route to happiness

1. The Rat Race  Competitive consumption yields much smaller benefits to individuals when pursued at the society-wide level  The rat race = a Prisoner’s Dilemma Game. Everyone would be better off if the race was canceled  Yet, given that everyone else is racing, each individual is better off trying to win

The Rat Race as a Prisoner’s Dilemma

2. Increasing Importance of Positional Goods  Positional goods: Goods with a fixed or inelastic long-run supply. Housing in neighborhoods w/ good schools or natural amenities; slots in prestigous universities; the number of management level jobs in the economy.  Competition for Positional goods reduces quality of life, even as consumption of non-positional goods increases

Zero-Sum Game  Pure positional competition is a “zero- sum” game For every person who gains access to a positional good, someone else must give it up  Increases in income channeled into this competition fail to increase overall welfare

Next Step: Welfare with Social Consumption  Divide up each individuals consumption bundle into Competitive elements ○ Goods that yield utility as a result of social norms. ○ Positional goods Noncompetitive elements

The Utility Function: U A = U(X nc A, X c A, X c NA ) ○ Where X c NA stands for the competitive consumption bundle of all people who are not Aldo; as this number increases, Aldo’s utility decreases  Economic growth that increases the stock of competitive goods need not increase happiness (though it may)  Increases in the stock of noncompetitive goods unambiguously increases social welfare

Economic Implications Taxes on the consumption of status goods become efficient People tend to overvalue increases in private consumption and undervalue noncompetitive goods and environmental quality GDP growth fails to capture real increases in social welfare on yet one more ground

Can the Growth of A in IPAT Be Controlled?  Consumer culture: A society in which consumption is a primary means of achieving social status  Can economic policy change a culture? Consumption taxes Regulation of advertising Mandating Vacations

Consumption taxes: What to do with the revenue?  The European Model: Use revenues to fund social services. Does this reduce consumption or just redistribute it?  Use revenues to benefit sustainable development in poor countries via Debt relief Family planning Land reform Resource protection Clean energy and manufacturing

Consumption and Employment  Is high consumption necessary for the economy to operate? Not in the long run As consumption is reduced, work hours would also need to be reduced: eg, European workers have much more paid vacation than Americans (along with lower pay)  Consumption reductions in rich countries need not imply employment reductions, though they would require hours reductions.

A Startling Implication  In rich countries, social consumption theory says that beyond an initial adjustment period, in which people lowered their expected consumption levels, a shift of resources from current consumption to sustainable investment or development assistance would not reduce overall social welfare

Advertising Regulation  Advertising: a useful product, with negative externalities.  Focus on controlling the negative externality, not the product itself  TV advertising seldom provides the key useful component of advertising: information.

Examples of Regulation  Limits on the number of minutes per hour that can be devoted to advertising  Advertising-free television, supported by tax revenues  A “pollution tax” on national TV advertising

Can Economic Policy really change consumer culture?  Many European countries already have high consumption taxes, mandate longer vacations, and restrict advertising.  They have smaller cars and houses, better public transport and universal health care. Otherwise lifestyles are similar.  GDP grows slightly less fast; environmental footprint on some dimensions around 50% of US. Is there less of a consumer culture?