Download Chapter 11

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 “zerosum” 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:
UA = U(XncA, XcA, XcNA)
○ Where XcNA 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?
