Sustainable living using economics
The following guide takes a deep dive into what it is that makes consumption unsustainable and a new approach to sustainable living.
Estimated reading time: 10 – 15 minutes
Go back if you’re looking for a quick intro into the topic or a nice middle ground.
The Limits of Conscious Consumption
You’re here, reading a post about the impact of consumption on our environment and society so we assume that you try your best to be a ‘conscious consumer’ and ‘vote with our dollar’.
You spend your money on “Eco-Friendly”, “100% Sustainable”, “Cruelty-Free” products with hopes that the rise in demand will lead to some much-needed change regarding the types of products companies produce.
As important and necessary as our conscious consumption efforts are, there are issues with that being our (referring to conscious consumers as a whole) only way to influence the system.
The blurry line that is greenwashing
Here’s a prime example, according to the FDA regarding the claim of “Cruelty-Free”. — “The unrestricted use of these phrases by cosmetic companies is possible because there are no legal definitions for these terms.” FDA.gov
You read that right. In essence, anyone could create a cosmetics company, buy materials that are tested on animals, claim it to be “Cruelty-Free”, and start selling product as their is no definition for the claim.
When claims such as these have no oversight (see regulation below) and are typically nothing more than a marketing gimmick, how can we as consumers be sure that our dollar is actually supporting the causes we believe in?
Surely Burt’s Bees Burt is getting your dollar, right? False. Burt’s Bees is now owned by Clorox…the bleach company. Honest Tea? Coca-Cola. Tom’s?! Colgate. Boca Burgers?!?! Kraft Foods.
Is sustainable living possible in a consumer society?
Regardless of who owns a company and their true intentions, the other question is: Can consumption ever be truly sustainable? Afterall, the definition of sustainability is “the ability to be maintained at a certain rate or level”, and if we are all buying a new Patagonia jacket every winter (us and a growing percentage of the world’s population), can the environment sustain this level of consumption?
Last year’s jacket has to go somewhere. It seems logical to say that the most sustainable jacket is the one already in your closet.
So what can us conscious consumers do? How can an individual with limited money to spend and political influence influence a system run by the almighty dollar?
Our solution lies in the power of the collective and a theory you probably slept through in Econ101, the theory of externalities.
The Theory of Externalities
Externalities are those things we think about before buying something; were animals harmed, what will the impact on our environment be, was anyone exploited when making this product, etc.
They are the unintended consequences to a third party – the environment or society – created by the production or consumption of some thing, and they can be either positive or negative.
Wait. Don’t leave. Let us explain.
Positive externalities
Think about the hippest neighborhood in your city—the one with all the cute boutiques, and restaurants with al fresco dining.
Now think about the real estate in that neighborhood. It’s more desirable than in the less walkable neighborhoods, which results in an increase in move-ins, which results in more businesses in that area, which means more jobs –importantly, more walkable jobs (positive societal externalities) – which means less cars, pollution and congestion (positive environmental externalities). These are all positive externalities from the environment created from those businesses.
Negative societal externalities
Now think about a clothing store in that same neighborhood. The store fills its racks with increasingly high-quality goods that the residents in the neighborhood want (the demand).
As the real estate value of the neighborhood rises, the store owner must either set the price of their goods higher, or increase the demand – and therefore supply – of goods to pay their rising rent bill.
If prices of goods consistently increase, residents of the neighborhood may become priced-out (a negative societal externality).
Negative environmental externalities
If the goal of increased demand isn’t met, the owner could start cutting corners by buying goods from less reputable sources, or goods with large ecological footprints. (cheaper products that create a higher profit margin for the store owner)
Perhaps the store simply ends its reusable bag policy and opts for a cheaper plastic alternative. (a negative environmental externality)
These are all negative externalities created from rising demand.
This happens in large and small ways all across the world every single day.
About the example
*In this scenario, the thing being ‘produced’ was a transitioning upscale neighborhood, the thing being ‘consumed’ were the perks that come along with the neighborhood. Though, this could be anything; the production of a car and the consumption of gasoline when driving it, the production of a cigarette and the consumption via smoking that cigarette, etc.
Orange Slice Break
That was a lot to take in, let’s take a step back and let NBC’s The Good Place explain the world of externalities & sustainable living with hilarious simplicity.
This is Season 3, Episode 10 of The Good Place – The Book of Dougs
*spoiler alert: this clip is about 75% through the show. skip it if you plan on watching the show*
Carrots and Sticks
Let’s get back to it.
Now, according to economic theory, there are two ways to encourage positive externalities and minimize the negative ones. This is typically done through “Carrots and Sticks.”
Legislative carrots
Legislative Carrots: Subsidizing industries and businesses that invest in goods and services that provide benefits to all of society
– Producer example: The Farm Bill, which guarantees that a farmer will receive a set price for his crop even if they have a poor yield
– Consumer example: Electric Vehicle Tax Credit, to encourage consumers to buy electric cars
Regulatory sticks
Regulatory Sticks: A tax or financial burden intended to make producers and consumers of goods pay the true social cost. (purchase price + external costs = true social cost…we’ll explain shortly)
– Producer example: The Vehicle Emissions Standards, which set legal requirements governing air pollutants released into the atmosphere.
– Consumer example: Tobacco Tax on cigarettes, intended to discourage the behaviour.
So, in short: Money.
Engaging externalities for sustainable living
Back to the neighborhood example: The standard of living is rising, as are the costs. Residents are beginning to feel the pinch of the more expensive goods and at the same time the quality of goods is beginning to diminish.
Engaging the theory of externalities for sustainable living, a regulator may see this situation and write up some Carrots and Sticks to encourage the positive and reduce the negative externalities associated with growth.
A carrot
Perhaps the city creates a rental assistance program to subsidize housing. This enables apartment owners to fill their buildings while offering housing for those in need, opening up funds to pay for their essentials. This would be a legislative carrot.
A stick
Maybe the city recognizes a rise in tobacco use and associates it with financial stress. They then implement a tobacco tax on cigarettes and use the tax revenue to fund health education services. A regulatory stick.
Creating the change you want to see
But what if you’re aware that a subsidy like The Farm Bill mainly supports big agriculture, something you are against.
Apart from voting in candidates with similar belief systems, how do you encourage the carrots and sticks you wish to see pass, pass?
Regulating the Regulators
As a conscious consumer, you are making informed choices every day about where your money goes. You know why you prefer small, local businesses over big box stores, and you know why you’re buying organic grass-fed beef over the alternatives.
You’re voting with your dollar and influencing consumer demand.
But then Clorox buys Burt’s Bees and Kraft Foods buys Boca Burgers, and our representatives continue to support big business over sustainable progress.
Your ‘dollar vote’ for the little guy, Burt, ends up going into Clorox’s pocket (which, who could blame Burt for accepting the outrages sum of $925 million from Clorox), and the government continues to subsidize harmful Big Ag practices. The system can start to feel a little rigged, a bit out of your control.
So who’s the regulator of the regulators and the legislator of the legislators?
Non-profits & NGOs, our way in
Who are the regulator of the regulators and legislator of the legislators?
Enter non-profit and non-governmental organizations (NGOs).
From arts and culture to research and education, environment and animals to international law. These are groups that function independently of any government and typically serve a social or political goal.
They give a regulatory power to the people. They do it by lobbying for the carrots and sticks we want to see in government, and by directly engaging with the unintended consequences of our consumption.
*e.g. the Plastic Pollution Coalition’s cleanup efforts. 350.org’s fight against the rise of co2. the National Sustainable Agriculture Coalition’s (NASC) advocacy for policy reform in our food systems in the halls of congress.
With these doors available, we now just have to walk through, easy as that, right?
Unfortunately, walking through these doors and affecting systems, like big agriculture, requires funding…a massive amount of funding.
Crossing the hurdles
We now have two hurdles to cross:
1) Making your conscious consumption achieve its intended effect.
*when you buy that Boca Burger, let’s make sure Kraft Foods uses the funds to invest further in environmentally beneficial systems, not just to bamboozle you with a ‘green is clean’ marketing gimmick to sell more burgers*
2) Funding impact organizations without giving an arm and leg.
*the average consumer doesn’t have thousands of dollars to throw at a campaign*
What’s the quickest way to cross two hurdles? You may say running faster. We say stack the hurdles on top of each other and cross them in one go.
How do we plan to do this? Let’s get back to that econ theory, the theory of externalities.
External costs, the sustainable living nemesis
Nestled between the price tag of the goods you’re purchasing and these externalities is the root issue behind consumption, external costs.
Imagine a bag of cheap Chicken. What is it that makes it so much cheaper than the other options?
We’re all aware of the externalities that come with these products; we see them in pictures of overcrowded factory farms, massive deforestation projects to make way for the cattle, or as the discharging of untreated waste into our waterways.
Included costs
Costs included in a bag of chicken’s price tag would include things like the animal feed, the land for the factory, the equipment for slaughter, packaging, transportation, etc.
External costs
But what about the cost of high quality feed over subsidized corn, the cost of carbon offsets (the carbon that would have been sequestered by these trees), or the cost of proper treatment and disposal of the animal waste?
These are the external costs of production. They are costs avoided by the producer, and as a result, not included in the price tag, but instead passed on to an unwitting third party.
It looks like this ↓
Purchase Price + External Costs = True Social Cost
Here’s a behind the scenes look at the economics of this hypothetical situation:
Included (Internal) Costs + External Costs = True Social Cost at register (What the bag of chicken should cost)
$7.63 Bag of Chicken + $1.03 in External Costs ($0.47 high quality feed + $0.30 carbon offsets + $0.26 waste treatment = $1.03 *) = $8.66 True Social Cost
With the price of chicken now slightly higher, competitors offering organic, non-GMO, etc, products now have a realistic chance at competing and changing the system of big agriculture. With the prices more competitive, perhaps Boca Burgers would not have had to sell to the giant that is Kraft Foods.
If you’re wondering why things like organic, electric vehicles, and local are more expensive, they’re simply including more of their external costs in their products.
Included Costs = Cost at register (What the bag costs when external costs are not included)
$7.63 Bag of Chicken = $7. 63 Cost at register
(external costs have been avoided by the producer and passed on to a third party, typically the environment or society)
So what happened to the $1.03 in external costs? Keep in mind that these costs are usually “covered” by a third party, but eventually that third party comes to collect it’s debts (an environmental bail bond, of sorts).
External cost -> externality 1
a) The $0.47 external cost could have paid for higher quality feed,
Instead it resulted in the externality of sick and poorly treated animals.
While the cost was initially covered by the animals, society eventually pays the external cost as seen in rising healthcare bills from an unhealthy population (see antibiotic resistance and animal diseases blog).
Externality 2
b) The $0.30 external cost could have gone to setting up a regenerative farm,
Instead it resulted in the externality of deforestation.
The cost was initially covered by our natural resources, but society pays the price as seen in forced migration from rising sea levels, or the cost of a home burned in a forest fire, all a result of climate change.
The 3rd externality
c) The $0.26 could have gone to pollution controls,
Instead it resulted in an externality of pollution.
The cost was initially covered by our water and air, but eventually we pay the price as seen in the loss of biodiversity, or a community that is forced to buy bottled water when there is no clean water left.
The math of external costs
* External costs would be the amount of goods sold divided by the total external cost.
Imagine it would cost a producer $10,000 for new pollution controls and they sold 2,600 bags of something. The price per bag would be 2,600 / $10,000 = $0.26 in external costs per bag.
Mitigating Externalities
Pigouvian taxes
The current “stick” for making companies pay for their external costs is called a Pigouvian Tax.
It’s a tax on anything that creates a negative externality, like a carbon tax, but for all unintended consequences of production. It’s purpose is to raise the price of the good to a level where smaller, or more purpose driven companies, could compete. And while Pigouvian Taxes are great in theory, they are rarely ever implemented effectively.
But who can blame them? It’s hard to determine the exact cost society will eventually pay by chopping down a few thousand trees.
*remember, externalities are costs to a third party, a third party being someone (or thing) that has nothing to do with the production or consumption of the good. (in this case, everyone (or thing) who isn’t using or making money selling the wood/paper)*
It’s even harder to determine this exact cost when the company chopping down the trees gives you a pocket full of money to say the cost is less than it is.
Crossing both hurdles
So here we are. We know that conscious consumption works (so long as you have the time and money to deeply research the products you’re buying), and we know that there are carrots and sticks in place to watchdog over companies.
So how is it that an individual consumer with limited time and money can influence a political system run by the almighty dollar?
It’s time to cross both of those hurdles at the same time and tie this sustainable living thing together.
Imagine a world in which the spare change from the things you bought acted as payment for these avoided external costs. The change automatically went to the non-profit & non-governmental organizations mitigating these unintended consequences. It was used to either clean up, or fund initiatives making sure that we aren’t getting bamboozled by green marketing gimmicks and making it difficult for companies to avoid their external costs.
Imagine Econus
From Conscious to Active Consumers
Buy that bag of chicken
Say you buy that bag of chicken. You’re aware that the company is known for the inhumane living conditions at their farms, but you don’t have the money to buy the “free-range” alternative.
Instead, you send your spare change from that purchase to an organization, like the Humane Farming Assocation, and they use the funds to lobby congress for more strict animal rights laws.
Take that trip.
How about this.
You buy a tank of gas. That tank of gas leads to congestion on the roads and an increase in air and noise pollution.
What if when you bought that tank of gas, you sent your spare change to an organization either lobbying for increased electric vehicle subsidies (making them more affordable for the average consumer) or an organization pushing for more strict fuel emission standards (making the roadways less polluting).
Imagine if all 15.6 million tanks of gas sold each day in the United States (391 million gallons sold / average 25mpg) had ~$0.40 cents donated to the International Council on Clean Transportation.
That would be $6.2 million towards their electric vehicle incentive program…per day.
If you don’t think it’s the little things that count, think of it this way. Your one tank of gas contributes to 1/15.6 millionth of the gas problem (1/15.6 million tanks sold each day).
Yet the issues we’re all fighting against exist.
Becoming Active Consumers
When we consciously consume and actively engage with the economic consequences of our consumption we become more than Conscious Consumers, we become Active Consumers, if you will. (See what we did there?). Sustainable living becomes more in your control.
At The Active Consumer, we are focused on providing facts and solutions about the external costs associated with consumption and empowering you to do more than buying green and trusting profit-driven businesses to do the right thing.
We know that when groups of like-minded people join together we can make a tangible difference in moving the needle towards sustainable living.
