11.0 Introduction

What were your grandfather and grandmother doing in 1960, when they might have been in their early twenties? Were they in college? Or, working? If they were in school in the United States, then they had, on average, about 30 percent of your income. Put another way, in inflation-adjusted terms, for every $100 you spend a week, they spent only $30. What did that mean? They grew up in small houses without air conditioning; were very unlikely to own a car, a record player, or a typewriter; probably had never flown on a commercial airplane; hardly ever ate out in restaurants; seldom traveled away from their home city; had no Tylenol, Advil, or allergy medications (just aspirin); obviously, had no smartphone, Internet, cable subscription, or playstation. Do you think you are happier than they were? If not, why not? If so, how much? A little? A lot? Are we making progress? Or, are we a society mired in “overconsumption?”

Within the benefit–cost efficiency framework, there is simply no room for the concept of overconsumption. The whole point of doing a benefit–cost study, after all, is to ensure that we do not sacrifice too much consumption in pursuit of environmental quality. From an efficiency perspective, increase in consumption in our generation over what our grandparents enjoyed clearly reflects progress.

How then can overconsumption be viewed as an environmental problem? First, consumption (or affluence) crops up in the IPAT equation from Chapter 9:

IPAT suggests that one of the three main causes of environmental decline is the growth in the consumption of material goods. Why? From an ecological perspective, pessimism is in order about the possibility of technological progress to keep up with the pace of consumption (and population) growth. Thus, for ecological economists, the fact that consumption levels are high and growing gets translated into overconsumption as a serious environmental problem. Efficiency advocates, by contrast, are technological optimists and so do not view consumption itself as a serious issue.

If, as ecological economists believe, technological progress cannot offset the environmental impact of an expected quadrupling of consumption over the next 50 years, then this is one sense in which overconsumption is indeed a major environmental issue. But, this chapter focuses on a second argument against high consumption. It does so by questioning a key assumption of the efficiency standard and benefit–cost analysis: “More is better.”

Recall that our target of an efficient outcome was defined as one in which it is impossible to make one person better off without making someone else worse off. In practice, better off means “having more goods.” We should remember that goods can include environmental amenities, such as hikes in the mountains, nice views, or clean air, but these are considered by benefit–cost economists as simply goods that are literally exchangeable for hair conditioners, air conditioners, or video games. They are exchangeable because having more of one of these goods means having less of another. This in turn means that they can ultimately be valued in monetary terms, if only indirectly, along the lines spelled out in Chapter 5.

But, what if more isn’t really better? If material gain in fact does not lead to greater happiness, then efficient outcomes do not really increase welfare. If more isn’t better, then the trade-off identified by benefit–cost analysis—more environmental protection means less of all other stuff—loses much of its force, and safety or ecological sustainability goals make more sense. Finally, if more isn’t better, then it is certainly fair to say that society is “overconsuming” the resources.

11.1 Money and Happiness

One crude but accurate way to state the more-is-better assumption underlying benefit–cost analysis is that “money buys happiness.” Does it? According to Jesus, Buddha, Mohammed, and other spiritual leaders, the answer is no. However, let’s take a look at the scientific findings of survey researchers on this issue.

For more than five decades, researchers have been asking groups of people about the relationship between income and happiness in their lives. The results of many studies in America and Western Europe reveal a strikingly similar conclusion: money does buy happiness, but it does so at a decreasing rate. Table 11.1 summarizes the results from a recent survey of 900 working women from Texas. Note that for comparison, median family income in the United States is about $50,000. These figures are typical of those found in most other studies and illustrate what has been called the Easterlin paradox: Rising income is clearly correlated with increased life satisfaction only up to around the median income level. It is well documented that rich people are not much happier than middle-class folks.¹

Moreover, among Western countries, people in wealthier nations often report being less happy than those in poorer ones. Ireland, for example, with two-thirds of the per capita income of the United States, ranks consistently higher on the life-satisfaction scale.² And the percentage of the U.S. population reporting themselves to be “very happy” has remained roughly constant since the 1950s, despite personal consumption expenditures per capita having more than doubled.³

Why is it that money doesn’t buy much happiness and only does so up to a point? We consider two answers to this question: the first one rooted in the psychology of consumption, and the second in the material realities of modern life.

11.2 Social Norms and the Rat Race

Here is the famous economist Adam Smith, writing in 1759:

From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation are all the advantages which we can propose to derive from it. It is the vanity, not the ease or the pleasure which interests us.⁴

In this amazing passage from 250 years ago, Smith declares that people sought to improve their material condition primarily for “vanity” as opposed to the “ease or pleasure” (utility) that came with increased consumption. Imagine what he would conclude today, when individuals below the poverty line are, along many dimensions, richer than were the upper classes of Smith’s era?

An 11-year-old friend recently reported to his mother that he wanted a pair of brightly colored, baggy pants manufactured by a company called Skidz. These pants were retailing for $54, and so his mother was a bit reluctant to buy him the pants. She offered to make him a pair that looked and felt identical, figuring she could do that for as little as $10. “No way,” said her son. The homemade pair would not have the Skidz label on the back, and that was really what made them cool. She asked him if he really wanted her to spend $44 for a label, and he said without hesitation, “Yes.”

In our affluent society, access to food and shelter sufficient for basic survival is widely, though not universally, available. Under these circumstances, much consumption of goods and services takes on a profoundly “social” character. The utilitarian value of the Skidz pants—their warmth, comfort, and cheerfulness—was much less important to my friend than the idea that they were “way cool.” Along the same lines, the pleasure felt by the owner of an expensive sports car lies not only in the excitement of fast driving but also, and perhaps more importantly, in the image of a fast-driving man the car provides to both the owner and others.

The social norms that we satisfy through our consumption are established in the communities in which we seek membership and recognition. The type of community may range from a romantic community of two to the nuclear or extended family, from a circle of friends to a neighborhood, or from a religious or ethnic group to a union or professional organization, but the need to belong to at least one of these groups is a powerful motivating force. Critics of growth argue that much of our consumption—from the clothes we wear to the food we eat to the cars we drive—is geared not only or even primarily to attain physical warmth, nourishment, comfort, or transportation but rather to attain membership and recognition in one of these communities.

The point here is not to pass a value judgment on this process in which we all participate. Rather, the idea of consumption norms simply explains the observation that money fails to buy much happiness. On the one hand, greater income increases access to intrinsically useful goods and services. On the other, as people grow wealthier, the expectations of the community rise, and keeping up with social consumption norms becomes more costly.

One can divide the social motives for consumption into three rough categories: bandwagon, snob, and Veblen effects.⁵ Bandwagon effects refer to a desire to consume something because others are as well, in order to conform to a social norm. Television commercials frequently play on the bandwagon effect. McDonald’s ran a campaign advertising “Food, Folks, and Fun.” The message was clear: come on down and join the party, and incidentally, you can eat here too.

At the same time, Burger King was trying to set itself off from the crowd with its slogan: “Sometimes, You Gotta Break the Rules.” The appeal here was to the snob effect—the desire to do or consume something because others aren’t. The snob effect is usually attributed to those buying expensive products to differentiate themselves from the common herd. But, the sentiment may also be exploited, as in the Burger King case, to sell the humble hamburger. Or, to take another example, it can be seen in the college professor who takes pride in driving a beat-up car to show that he, unlike the rest of the world, does not care about material goods. The desire for Skidz pants expressed by my young friend showed both bandwagon and snob influences—they were cool both because cool people were wearing them and because uncool people were not.

The words bandwagon and snob are perhaps poorly chosen, because they have rather negative connotations. But, the desire to join in and the desire to be different in fact reflect quite normal, universal, and important social drives. For example, the desire to “get ahead” in any pursuit—sport, music, science—reflects both the snob effect (get ahead of one’s peer group) and the bandwagon effect (become like those who are already ahead).

The final social motive underlying consumption is named after Thorstein Veblen, an economist who argued that status could often be achieved in our society through the open display of wealth, what he termed “conspicuous consumption.”⁶ The Veblen effect is the purchase of expensive goods to illustrate to the community that the owner is a person of “substance”—that is, someone with money and the power that money brings. Its purpose is to elicit envious statements such as “He wears a Rolex” or “She drives a BMW” or “He belongs to the High Society Country Club.” Part of the “coolness” of Skidz pants was certainly their high price—wearing them said to the rest of the kids in the class: “My parents have got the power to get me what I want, even if it costs a lot of money.” While the Veblen effect is related to the snob effect, the two are not identical. Veblen goods hold appeal primarily because their expense denotes membership in a certain social class; as noted, the definition of a snob good varies from consumer to consumer and need not involve expensive goods.

To the extent that material consumption is not geared to utilitarian functions but is rather a means to an end of satisfying social needs for membership and status in a community, it is not surprising that attaining more material goods fails to increase happiness to any significant degree. Among both poor and rich, bandwagon and snob effects will greatly influence the degree of satisfaction obtained from consumption. Whether it is the right smartphone to impress your friends, the right bike for joining a motorcycle gang, the right T-shirt to wear to a party, the right beer to serve at a cookout, the right restaurant to please your sweetheart, the right suit to keep your job, the right school for your children, or the right street address to get into a particular golf foursome, membership and recognition in the community are an important by-product of consumption. As people get wealthier, “basic” needs multiply; in other words, it costs more to satisfy the social norms.

Having said that, it is clear that many people do want more material things. Indeed, survey research reveals that “getting ahead” in terms of income is clearly correlated with increases in reported life satisfaction. Although rich people are on average only a bit happier than poor people, people who have recently gotten richer are much more satisfied with their lives than people who have recently gotten poorer. Social satisfaction from consumption apparently requires not just keeping up but also getting ahead of “the Joneses.” Exceeding the consumption norms established by one’s peer group, family, and personal expectations appears to be the material route to happiness.⁷

However, while getting ahead may make sense from the individual perspective, competitive consumption is a strategy that yields much smaller benefits to individuals when pursued at a society-wide level. If everyone is racing for entry into the next-highest social group, it becomes much difficult to get there, and for every winner in the race, there will be losers. Moreover, everyone now needs to run harder just to stay in the same place.

The common name for this kind of situation is a rat race. The two distinguishing features of a rat race are that (1) everyone would be better off if the race was canceled and (2) given that everyone else is racing, each person is better off trying to win.

This situation can be analyzed through the so-called prisoner’s dilemma model. (Suggestion: stall your class by asking your professor to explain the name “prisoner’s dilemma.”) Figure 11.1 illustrates the situation facing two students, Arnold and Maria, who have been asked to bring soft drinks to a party. Each student can choose to bring either Coca-Cola or budget cola. For the purposes of argument, assume that the quality of the products is the same—blindfolded, people on average don’t prefer one to the other. (Suggestion: stall your class by bringing in supplies for a demonstration taste test.) But Coke, given its large advertising budget, has developed some name recognition.

Suppose that the initial social norm among the students is to drink the budget brand. If both parties then go for the budget brand, nobody is embarrassed by bringing a product perceived to be cheap. As a result, the utility of both students is 10. This is clearly preferred to an outcome in which the social norm is to buy Coca-Cola—as the quality is the same, and the cost is higher. As a result, the Coke–Coke outcome yields utility of only eight to each student.

But, in this setup, it will be difficult to maintain budget–budget choices as the social norm. Consider what happens if Arnold goes budget while Maria shells out for Coke. Maria receives (subtle) praise for exceeding the social norm, so her utility rises to 12, while Arnold is (quietly) shamed and finds his utility falling to 7. The same holds true in reverse if Maria buys budget while Arnold goes with Coke.

Although both parties would prefer the budget–budget outcome, both have strong incentives to “cheat” on any informal agreement to maintain the budget–brand social norm. If on the one hand, Maria chooses budget, Arnold can gain at Maria’s expense by exceeding the social norm and going for Coke. If, on the other hand, Maria exceeds the norm, Arnold is better off defending himself by doing the same. Regardless of what choice Maria makes, Arnold is better off choosing Coca-Cola, and vice versa.

An interesting study identified a real-world prisoner’s dilemma operating in professional organizations. The authors found in a survey of legal firms that attorneys are “overworked” in the sense that they would like to trade increases in income for time off. But publicly, lawyers are afraid to admit their desire for shorter hours, fearing that this will signal to partners that they are unproductive (even if they are not). As a result, the social norm for the hours worked is too high—everyone would be made better off if a lower standard workweek could be agreed on and enforced. This change in norms would scale back the rat race, lowering both incomes and material consumption while raising leisure time.⁸

By framing the rat race as a prisoner’s dilemma, we can see how social consumption norms get ratcheted upward. A rat race often emerges whenever people send social signals through their consumption or workplace behavior and especially when bandwagon, snob, or Veblen effects dominate the motives underlying the desire for more material goods. And, if the social satisfaction obtained from material gain is indeed dependent on surpassing one’s neighbors, economic growth simply cannot quench the social desires that people attempt to satisfy through increased consumption.

11.3 Positional Goods and Consumption Externalities

One reason that money does not seem to buy much happiness is the social psychology of consumption. However, another reason is rooted in the realities of modern-day growth. A paradox of our affluent society is that, even as we grow wealthier, access to certain goods becomes more and more difficult. Consider the recent “housing bubble.” Any market in which speculation can take root is based on inelastic supply, at least in the short run. So, in the early 2000s, investors who had been burned in the tech bubble on the stock market turned to housing. Paradoxically, though, the rapid run-up in some urban and suburban housing prices occurred at the same time that many other urban neighborhoods featured boarded-up buildings and high vacancy rates. So, the shortage driving the bubble was clearly not one of housing units, but rather of units in a “desirable” neighborhood: prosperous, safe, with access to good schools, and within easy commuting distance to jobs and amenities.

Housing in desirable neighborhoods is a good for which long-run supply is very inelastic, and in these neighborhoods, investors felt safe watching housing values skyrocket. The price run-up seemed simply the continuation of a long-term trend. One effect of the massive “suburbanization of America” that has been occurring over the last 50 years has been an increase in the price of housing within the commuting shadow of all major cities. At the same time, these areas developed many of the urban problems that people were attempting to leave behind: increasing congestion, traffic jams, longer commuting time, higher crime rates, and, in general, a lower quality of life for residents. Simultaneously, citizens left behind in the inner city have seen their communities deteriorate drastically as members of the middle class fled to the suburbs, shrinking the tax base of the cities.

Driving this process has been increased private demand for “better housing.” While many individuals did get such housing, the social outcome was less positive. The limited supply of this good in the suburbs was rationed through both higher prices and increased congestion. Concurrently, property values in the cities plummeted, and the quality of life for many residents there has become increasingly desperate. Two economic concepts help explain this phenomenon: positional competition and consumption externalities.

Goods with a fixed or inelastic long-run supply, such as uncrowded suburbs within an easy commuting distance to the city, are referred to as positional goods. Positional competition is the competition for these goods. Some simple examples of positional goods are 50-yard-line Super Bowl tickets, Rembrandt paintings, or spacious seaside vacation homes. Less obvious examples include commuter highways, slots in prestigious 4-year colleges, creative work, jobs with status and authority, green space in the city, accessible wilderness, and clean air and water.

As people grow wealthier, the demand for these positional goods increases. In the face of this growing demand, some rationing scheme is necessary. For privately owned goods, say football tickets, the price rises to eliminate the excess demand and clear the market. For many public goods, however, the price mechanism is ineffective. Here, the rationing takes place through congestion, for example, as seen in traffic jams.

Higher relative prices for positional goods combined with increasing congestion in their consumption have led to a degradation in the quality of life for many people. At the same time, the per capita consumption of TVs, dishwashers, smartphones, fast-food outlets, computers, pain relievers, and a million other commodities has increased. To obtain access to many of the goods that people took for granted only a generation ago, we must either pay a higher proportion of our income or accept a degradation in quality. This is not to say that economic growth has been on negative balance. The point is that increased positional competition generates an important and often unrecognized cost of economic growth.

Positional competition has been compared to a concert hall. If the individuals in the front row stand up to get a better view, then everyone in the entire arena has to stand. Eventually, everyone is uncomfortably up on their tiptoes, but no one can see any better than they could while sitting down! Once again, getting ahead makes sense from an individual perspective, but the social result is to leave everyone worse off.

Positional competition often generates consumption externalities. These are benefits and costs of consumption not borne by the consumer—in the example provided earlier, blocking a neighbor’s view. Or, consider the private decision to commute by car. Although it may save 20 minutes of the driver’s time, it also contributes to traffic jams because it reduces the speed at which others can get to work. More generally, the cumulative effect of thousands of private decisions to move to the suburbs is to introduce many of the problems of the city: increasingly depersonalized communities, deteriorating schools, rising crime rates, and environmental degradation.

Consumption externalities are important in other markets besides housing. An individual’s decision regarding educational attainment has important externalities, both positive and negative. On the one hand, there is such a clear social benefit to having a populace able to read and write that all agree that the government must subsidize and indeed mandate a basic education. On the other hand, advanced education is in many respects a type of positional competition. One’s decision to obtain a master’s degree in business administration increases one’s chance of getting a scarce “prestige” job, but, at the same time, decreases the chances of those without the degree. “Credentials inflation”—the competitive process by which degree requirements for entry into a given career are ratcheted upward—is a negative consumption externality.

Pure positional competition is what economists call a zero-sum game. For every person who gains access to a positional good, someone else must give it up. As positional goods become more important in our economy, increases in income channeled into this competition fail to be translated into overall increases in human welfare. This holds doubly true when consumption decisions bear important negative externalities, as in the case of housing and advanced education.⁹ These two factors help explain the paradox that although individuals act rationally to increase their wealth, collectively we fail to grow much happier.

11.4 Welfare with Social Consumption

It is useful to recast the arguments of the preceding section into our utility/social welfare function framework. To do so requires that we divide up each individual’s consumption bundle into competitive and noncompetitive elements, $X^c$, $X^{nc}$. The former contains (1) rat-race items—those that bring utility primarily because their consumption involves exceeding social norms; (2) positional goods; and (3) goods with significant negative consumption externalities. The noncompetitive bundle includes everything else: goods consumed primarily for their intrinsic utility (taste, warmth, relaxation); leisure time spent with family and friends; physically or intellectually challenging activities; and many environmental goods such as clean air, water, and health.

In practice, this competitive–noncompetitive distinction may be a difficult one to make. Under which category does bike riding fit? The biking experience itself is very noncompetitive, and yet, some of the pleasure serious enthusiasts feel for the sport is driven by competitive social norms—wearing the latest clothing or owning the most up-to-date machine. Yet, in principle, it is possible to sort out the consumption components that are fashion- or status-driven from the consumption components of the sport itself.

By doing so, we can rewrite Aldo’s utility function (from Chapter 2) as

The last term, $X_{\mathit{NA}}^c$, stands for the competitive consumption bundle of all people who are not Aldo (NA); the negative sign above $X_{\mathit{NA}}^c$ indicates that Aldo’s happiness decreases as the social consumption of others goes up. Aldo still gets happier by increasing his consumption of both noncompetitive ($X_A^{\mathit{nc}}$) and competitive goods ($X_A^c$); more remains better for Aldo as an individual. But, his overall happiness now depends on the consumption levels of his peer group.

There are two lessons to be learned from this form of the utility function. The first is that economic growth that increases the supply of competitive consumption goods need not increase happiness (though it may). Every time one person gets ahead, a new standard is set for the community. Indeed, competitive consumption goods are often sold by making people who don’t buy the product feel worse off! (Consider, for example, the typical deodorant campaign that exploits insecurities about being left out and unhappy.)

The second lesson is that, under this form of the utility function, increases in the stock of noncompetitive consumption goods unambiguously raise social welfare. Many, if not most, environmental “goods”—human health, appreciation of natural beauty, respect for both human and nonhuman life—are primarily noncompetitive. One person’s enjoyment of his health does not “raise the standard” that others must aspire to. Similarly, land set aside for parks is land not available for private development as part of status-enhancing positional competition. Thus, a case can be made for weighting these items more heavily than material consumption in a social welfare function.

What are the economic implications of all this? When relative consumption becomes important, three conclusions emerge. First, taxes on the consumption of status goods become efficient; they improve the overall well-being by discouraging excessive work effort and increasing leisure. They also reduce unnecessary production and thus pollution. Second, people tend to overvalue increases in private consumption (given the negative externalities imposed on others) and undervalue noncompetitive public goods and improved environmental quality. Thus, willingness-to-pay measures need to be adjusted upward to reflect the true improvement in well-being generated by a cleaner environment. In the case of global warming, for example, researchers estimate that the efficient tax on carbon dioxide is 50 percent higher than that yielded by conventional benefit–cost analysis.¹⁰

Finally, in economies where status goods are important, GDP growth fails to capture real increases in social welfare on yet another ground. As discussed in Chapter 9, economists have in fact made several attempts to construct a social welfare index that reflects some of the disamenities of economic growth. The idea is to adjust our basic measure of economic growth—GDP—to better capture the “true” trend in social welfare over the last few decades. If you turn back to Table 9.1, you will find a description of the Genuine Progress Indicator or GPI.

GPI proponents claim to have uncovered a dramatic slowdown in improvements in the average quality of life over the last few decades, while GDP continued to rise at a steady pace. The GPI does this in part by accounting for the negative consumption externalities arising from positional goods discussed in this chapter. For example, in addition to the conventional externality costs, the researchers deduct the costs of urbanization, increased commuting time, and auto accidents from augmented GDP. They also subtract the rising price of land.

Yet, for purposes of the index, the GPI researchers accept the conventional assumption that more is better. According to the GPI authors, “Our calculus of economic well-being has failed to take into account that happiness is apparently correlated with relative rather than absolute levels of wealth or consumption. Having more is less important than having more than the ‘Joneses.’ Yet in the absence of any way to quantify this sense of relative well-being, we have ignored this important finding in our index, just as others have.”¹¹ If they had devised such a measure, it seems likely that the net national welfare would have increased even less than that they estimated over the past 30 years, despite the tremendous growth in GDP.

To summarize, if social norms drive much material consumption, and positional goods and consumption externalities are relatively important in the economy, a strong utilitarian argument can be made for environmental protection. The happiness trade-off between environmental protection and economic growth is not as great as it seems.

11.5 Overconsumption Policy Solutions

A society in which consumption becomes the primary means of achieving social status is known as a consumer culture. The reasons for the advance of the consumer culture in rich countries are complex, including factors as diverse as the increasing mobility of both workers and jobs and the subsequent breakdown in community, increasing exposure to television and advertising, and a decline in the moral influence of religion, which traditionally preached an antimaterialistic message.

Some people have argued that as environmental awareness spreads, people in wealthy countries can be persuaded to abandon their affluent lifestyles and begin, for example, riding bikes to work. Yet, the advance of the consumer culture appears to be pervasive and very deep-seated. One sees it best through a comparison of generational attitudes. I (Eban) admit to being a bit shocked when I asked my 6-year-old niece why she wouldn’t let me cut the huge L.A. Gear tag off her new tennis shoes. “That’s what makes them cool,” she said. My young niece’s strong brand identification—the shoes made her happy because of the label—was the result of a shift in marketing strategy by clothing firms. When we (Steve and Eban) were small, firms marketed children’s clothes to their parents, and the emphasis was on rugged and practical. Now, Saturday morning cartoons are filled with clothing ads targeted directly at children, and the emphasis is on beauty and status. Our parents, of course, had much less exposure to marketing and find our attachment to many of our family gadgets a bit puzzling.

Thus, even if you believe that high levels of consumption in affluent countries are a major environmental threat, it is difficult to imagine making much headway against the consumer culture via moral arguments alone. This section discusses three potential economic instruments for reducing consumption: consumption taxes, mandated European-style vacations, and the regulation of advertising.

Many economists have argued for nonenvironmental reasons that the U.S. consumption rate is too high or, equivalently, that the national savings and investment rate are too low. During the 1980s, national savings declined from around 8 percent to 2.4 percent of the net national product and, by 2000, had actually become negative, while the foreign debt skyrocketed. The argument made is that, for the last two decades, we have been financing the current consumption at the expense of investment in created capital, which portends a decline in living standards. Nordhaus makes, in effect, a nonenvironmental sustainability argument for reducing the current consumption.

The policy response called for has been an increase in taxes (income or sales) to reduce consumption and increase savings and investment. The ultimate purpose, however, is to boost consumption in the future. This is clearly not the policy goal proposed here. Yet, if the revenues from such a tax were invested in the generation of new, clean technologies, such as those discussed in Chapters 17 and 18, this kind of policy could achieve the goal of reducing the environmental impact of consumption. This would be true even if consumption levels themselves had only temporarily declined.

Alternatively, taxes could be used to divert the resources away from consumption in rich countries to sustainable development efforts in poor countries. Funds could be used for a variety of purposes: from debt relief to family planning to land reform or resource protection efforts to transferring clean energy and manufacturing technologies to poor countries.

As a final point, in rich countries, social consumption theory has a rather startling implication: beyond an initial adjustment period, in which people lowered their expected consumption levels, a shift of resources from the current consumption to investment or development assistance would not reduce the overall social happiness or welfare.

Put in more practical terms, suppose that income taxes in the United States were gradually raised in a progressive manner, so that ultimately the highest group faced a marginal tax rate of 50 percent, while poor Americans maintained the same tax rate. Suppose as well that the additional money raised was diverted to investment in environmental technology, to the training of scientists and engineers and to research and development. Social consumption theory says that in the long run, on average, people would be just as content. (Incidentally, wealthy Americans did pay a 70 percent marginal tax rate or higher throughout the 1950s, 1960s, and 1970s.) The problem with this theory, of course, is that there is an initial adjustment period in which people are dissatisfied. Given this, the political prospects for new taxes to promote sustainability—either environmental or economic—are challenging.

It is sometimes argued that high levels of consumption are necessary for a modern economy to operate and that a reduction in consumption would lead to high levels of long-run unemployment. Not necessarily. Reduced consumption can be accommodated if increased savings are channeled into domestic investment for long-run sustainability: in clean technology and human capital development.

Alternatively, one very sustainable way to reduce consumption without boosting unemployment is to mandate European-style vacations. In Western Europe, employers are required by law to provide workers with at least 4 weeks of paid vacation plus several days of paid holidays, and almost all countries have paid family leave as well. By contrast, one in four Americans has no paid vacation or holidays, and very few Americans get paid parental leave.¹² The way Europeans finance these vacations and holidays, in effect, translates into lower hourly wages—Europeans accept slightly slower economic growth and consumption in exchange for more leisure time.

Beyond boosting savings rates and increasing leisure time, a final possible strategy for controlling consumption is to regulate advertising. For such a strategy to make sense, one must first make the case that advertising in fact raises aggregate consumption levels. It is possible that advertising merely causes people to switch brands, leading to no overall increase in consumption. On the other hand, in the United States, we receive massive exposure to advertising. Indeed, TV might be thought of as the church of the twenty-first century. By the time the typical American reaches college, he or she will have spent 3 to 4 hours a week watching TV ads, about 100,000 of them in all.¹³ These advertisements all preach a variation of the same underlying social message: satisfaction through purchase. Such a constant propaganda barrage may well induce us to consume more than we otherwise would.

Assuming that advertising does have a major positive impact on overall consumption, effective regulation of advertising remains a difficult task. From an economic point of view, advertising has an important function—fostering competition by providing consumers with information about the availability, quality, or price of a product. Advertising can be thought of as a useful product itself, the production of which generates a negative externality, in the same way that paper production generates water pollution. Regulation should focus on controlling the negative externality—the promotion of consumer culture—rather than the product itself.

One way this has been traditionally accomplished is through the regulation of advertising on children’s television. The government sets limits on the number of minutes per hour that can be devoted to advertising and has in the past prohibited the mixing of advertisements and entertainment. Sweden, for example, bans commercial ads targeted at children under age 12.¹⁴

Another way to sort out “good” commercials from “bad” ones is by medium. Ads in the print and radio media have a more difficult time exploiting emotional weaknesses to develop brand identification than do television ads. They, thus, tend to provide much more useful information about price, quality, and availability. Local and trade-specific advertising also tends to be more information intensive than national advertising does. Perhaps reflecting the limited economic usefulness of national television advertising, many European countries have commercial-free television. (They finance the production of TV programs with tax dollars.)

In the United States, one possible policy measure would be to institute a “pollution tax” on national TV advertising. As with any tax, such a measure would cause firms to shift the resources away from television to other media or out of advertising altogether.

In the long run, any successful attempt to rein in the growth of per capita consumption in rich countries will require a broad social movement that challenges the consumer culture and its values head on—a discussion well beyond the scope of this book.¹⁵ With their high tax rates, generous vacation requirements, and controls on advertising, Western European countries such as Sweden or Germany demonstrate both the possibility of partial cultural transformation toward sustainability and the limits of a strategy targeted at restraining consumption. For example, although Europeans have much smaller global warming footprints than do most Americans, they still have a large impact on the planet. The average German is responsible for around 11.9 tons of ${\text{CO}}_2$ each year; the average American, 22.5. The global average is 5.6.¹⁶

At the end of the day, controlling the growth of “A” in the IPAT equation is possible through government policy—but doing so is an incremental process involving cultural changes much deeper than can be generated by simple legislation. Economic analysis does provide us with some useful insights, however. First, policies of shared sacrifice may in fact lead to little decline in overall welfare, if the happiness derived from consumption is relative. If this view is widely held, it suggests that people will more likely accept a tax increase to reduce their consumption for a “good cause,” such as their children’s welfare. Second, reducing consumption in rich countries need not lead to an increase in unemployment. Rather, labor and other resources can shift into production of goods for consumption in poor countries or into investment in clean technologies. Finally, a common proposal to restrict the advance of consumer culture, regulation of advertising, must be carefully approached because of the economic benefit—information—that advertising can generate.

11.6 Behavioral Economics and Behavior Change

Moving beyond top-down national policy options to address overconsumption, the focus of cities, states, NGOs, and private sector actors is often on persuading citizens to adopt more environmentally-friendly, day-to-day consumption practices: bike commuting, energy efficiency retrofits, composting, or recycling. A subfield of economics called Behavioral Economics studies this kind of micro-level behavioral change.¹⁷

Traditional (neoclassical) economics is based on a simple assumption that individuals seek to maximize their personal utility. While a model of individuals that assumes strict self-interest is useful for explaining some economic phenomena, in many others, it is too simple. In the first place, even if people were strictly self-interested, the world is too complex a place for humans to be constantly making trade-offs to actually maximize their utility. They are more likely to pursue behavioral strategies that get them “close enough.” And more importantly, as we discussed earlier in this chapter, humans are profoundly social creatures. While evolution may well have programmed us to pursue self-interest, we have “other-interested” motivations that have also resulted from several million years of natural selection, such as loyalty, xenophobia, friendship, hatred, and love. Understanding how our complex human psychology can be motivated to make changes lies at the heart of behavioral economics.

How do you get people to change? One example of a road map based on behavioral economics is laid out in a book called Switch: How to Change Things When Change is Hard.¹⁸ The authors propose the metaphor of a rider and an elephant. The rider represents the rational mind (or the “change agents” in an organization), while the elephant is the easily distracted human body (or the organization itself). Driving change requires first focusing the rider. The rider—whether an individual or a leadership team—tends to overthink things, spinning their wheels. So, the first task is to provide a clear and effective direction toward change.

The next job is to motivate the elephant. Elephants are powerful creatures when they get moving, but they need help to gather their enthusiasm. The final step is to smooth the path. Even if the rider has a clear road map, and the elephant is ready to charge ahead, obstacles in the path can frustrate the progress.

Switch offers as an example the successful effort to conserve the Amazon Parrot on the island of St Lucia. Faced with rapidly dwindling numbers of birds, the wildlife agency on the island did not have the resources to pursue standard policy approaches such as increasing punishments for poaching, setting aside habitat preserves, or establishing conservation funding through ecotourism. Instead, they launched a “pride campaign,” to capture the public’s imagination in support of protection.

The campaign first focused the riders. It gave all Santa Lucia residents who were concerned about the parrot one concrete job to do: to spread parrot pride. This led to the next step, motivate the elephant, in this case, the entire population of St Lucia. As public opinion swung in favor of the previously little-noticed bird, poaching declined dramatically and public efforts to protect habitat sprang up from the grassroots. Finally, wildlife agency officials smoothed the path by recruiting and then supporting businesses, educators, and others to creatively participate in the pride campaign. The St Lucia pride strategy has since been replicated with good success in more than 50 additional countries.

The rider and elephant approach highlighted in Switch, along with similar efforts by other behavioral economics researchers, provides insights that can help “change agents” in communities and organizations promote shifts in behavior.

11.7 Summary

The central metaphor behind benefit–cost analysis and the efficiency standard is a perceived environment–growth trade-off. More environmental protection in the form of regulations, bans, and red tape means higher costs and ultimately fewer “goods” for consumers. Why should everyone be forced to have a pristine environment, regardless of the cost?

Overconsumption critics respond in two ways. First, ecological economists argue that technology is increasingly less capable of providing substitutes for natural capital, and that the long-run costs of “business-as-usual consumerism” are much higher than efficiency advocates envision. Second, some economists have questioned the fundamental assumption that more is better, which underlies the defense of efficiency. Because much of the satisfaction derived from consumption is social rather than intrinsic in nature, and because of the negative externalities in the competition for positional goods that growth engenders, the benefits of economic growth are much smaller than conventionally measured.

If the more-is-better assumption underlying efficiency analysis is often simply wrong, then the case for pursuing safety or ecological sustainability instead is strengthened. When more isn’t better, “efficient” outcomes aren’t really efficient—that is, welfare enhancement. As a result, stricter safety or ecological sustainability standards may actually be more efficient than an approach grounded in conventional benefit–cost analysis.

The global impact of consumption growth is becoming larger as more and more people look to material consumption to satisfy the social needs for membership and status in a community—the advance of consumer culture. Three policies were explored for controlling the growth of consumption. The first was a tax whose proceeds were used to finance either investment in clean technology or increased consumption in poor countries. An important point is that declines in consumption in rich countries need not reduce overall employment; instead, they can represent a shift of resources including labor into other productive sectors. However, as social consumption theory predicts, tax policies can lower utility in the short run and are thus very difficult to sell politically.

The second policy would be to mandate extensive paid vacation; this would reduce work and output, leading to somewhat lower overall consumption in exchange for greater leisure time. And the final policy involved regulation of advertising, on the grounds that it promotes the growth of an unsustainable consumer culture. The danger here is that advertising can play a useful economic function, providing information and promoting competition. One possibility would be a “pollution tax” on national television advertising, which tends to be heavy on emotional appeal and low on information content. Beyond national policy, behavioral economics is beginning to reveal strategies to drive behavior change in organzations and communities.

This chapter concludes the first part of the book and our discussion of how much pollution is too much. At one end of the spectrum, we have considered efficiency as a target. In learning about the efficiency standard, we explored the tools that economists have developed to measure the environmental protection benefits and costs and the use of benefit–cost analysis. We have also examined the logic of promoting efficiency over time (dynamic efficiency) through discounting, granting the neoclassical assumption that technological progress will offset all resource shortages and that, as a consequence, human welfare will continue to rise.

At the other end of the spectrum, we have considered two stricter standards: safety and ecological sustainability. Both these approaches reject benefit–cost analyses and argue for protecting the environment “regardless of the cost.” But, in evaluating these approaches, we learned that there really is no such thing as a free lunch; ultimately, trade-offs do emerge, even if they are not as severe as neoclassical economists believe.

So, how much is too much? This ultimately is a values question and cannot be resolved by economics alone, but the goal of the first 11 chapters has been to provide the information and analytical tools you need to better resolve the question in your own mind. In the next presidential election, global warming is likely to be an important issue. Whether you support a candidate speaking for an efficiency, a safety, or an ecological sustainability standard for carbon dioxide emissions, you now have a better understanding of the issues at stake in your decision.

1. 11.0 This chapter explores the idea of “overconsumption.” The argument is that in affluent countries, continued economic growth does not in fact buy much happiness, while compromising the natural resource base and critical ecosystem services.
2. 11.1 The Easterlin paradox refers to survey data showing that increases in income boost reported happiness only slightly and only to about the median income level.
3. 11.2 One way to explain the Easterlin paradox is that satisfaction from consumption depends on one’s consumption relative to social norms. Social consumption patterns are influenced by bandwagon, snob, and Veblen effects. When people attempt to obtain happiness by competing in consumption levels, the process often degenerates into a self-defeating rat race, which can be modeled as a prisoner’s dilemma.
4. 11.3 Positional competition is competition over goods with a limited long-run supply or positional goods. Private positional goods are rationed by their increasingly high price; public goods are rationed by congestion. Competition over pure positional goods is a zero-sum game. Negative consumption externalities are often generated through positional competition.
5. 11.4 This section illustrates how the utility function changes in the presence of social consumption and positional goods. Goods must be divided into competitive and noncompetitive consumption bundles. While more of everything is still better at the individual level, externalities generated by others’ consumption now depress each person’s utility. It is, thus, no longer true that increases in society-wide consumption must increase happiness.
6. 11.5 A consumer culture is one in which the primary means of achieving social status is via material consumption. Three economic policies for reducing the spread of consumer culture are consumption-reducing taxes, mandated European-style vacations, and the regulation of advertising. However, economic tools can change attitudes only if they are part of a much broader cultural movement.
7. 11.6 Behavioral Economics is a subfield of economics that explores human behavior change given the complexity of human psychology. As one example, the “Switch” model for making change has three parts: (1) Focus the Rider (2) Motivate the Elephant and (3) Smooth the Path.

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