Wednesday, December 23, 2009

Does Conservation Work?

Earlier this morning I read an interesting blog post in which someone tried to explain that conservation, as we normally perceive it, doesn't really work. He relayed his first-hand experience of a cashier essentially asking to double-stuff his bag in order to "help the planet" (by not consuming more plastic bags). She then, supposedly, gave him 25 cents because he obliged.

My initial reaction to stores doing things like this (saving bags, turning off half their lights, etc.) is that it's a wonderful way for them to get business from the "green" crowd while simultaneously saving on overhead. Of course, in this particular instance the giving of a quarter to save a plastic bag seems to null the idea that they would be saving on overhead. Nevertheless it may be a good way to bring in environmentally conscientious customers.

In any case, he argued that conservation would not occur because instead of using the plastic bag, he would simply use that 25 cents to consume another good. In this case, he offers the idea of buying a dinner mint, and instead of consuming a plastic bag he would be consuming a foil wrapper. He then tried to apply this same concept to conservation of various kinds. Although people seemed largely sympathetic with his over-all view, there were several criticisms regarding the specifics. One person offered that the concept was invalid because it only worked when someone rewarded you, financially, for conserving. Another person actually made the argument that the cashier was increasing the money supply by giving him the quarter (how it wasn't considered in the money supply at that point to begin with is beyond me) and that it would effectively actually make all consumables slightly more expensive. I have to admit that explanation was really interesting; don't you hate it when a false premise ruins a perfectly enticing story?

Anyways, these two refutations did spark a point of interest with me. Even in a case where no money was given to this guy for not consuming a bag I think there is actually a strong economic point to be made that market feedback would prevent at least some types of conservation from being effective. Let's look at an example and see how this would play out:

Let's say there is a concerted effort to conserve gas (obviously there is one already but let's say a more effective one). They somehow convince one out of every twenty people in the U.S. to reduce their gas use by two gallons per week. Personal consumption of gasoline drops by thirty-million gallons a week suddenly. What would we expect to happen in a market environment? Well, this would essentially extend the common supply to the rest of market players by precisely thirty-million gallons. With a reduced demand, and an increased supply, we would expect gas prices to drop in order to clear market. And with that drop in price, we would expect aggregate demand to effectively increase (assuming production wasn't initially curtailed) and bid off the excess supply. And so, it seems very plausible that conservation, in some cases, may not result in the conservation of a good or resource but rather a shift in the consumer base.

I actually find that line of reasoning to be fascinating, and it's the direct result of "marginal" economics. The understanding that people buy goods at the margin is something that produces a lot of unexpected consequences, and I think the public's lack of understanding regarding subjective value and ordinal preference is a part of what produces so much mass confusion regarding basic economics. The idea is actually much more simple than it seems. You buy on the margin based on ordinal preferences. When you go to buy something, you buy it in the quantity that you do based on the price and your subjective evaluation of your desire for that item. For instance, if you're buying rolls of paper towels and they are two dollars a piece you may only have a preference for two at that price given your subjective evaluation of that trade-off. However, if the price was 5 cents per roll, you may have a preference for as many as you could carry out of the store.

This is marginal economics in a nutshell. It's always about the additional item you don't buy, the indifference curve, the opportunity cost. The argument I brought up above is actually somewhat similar to the arguments that were made a couple of years ago explaining that although tax cuts on things are generally desired, that a tax "holiday" on gas would not result in an actual price decrease. A drop of twenty cents (the per-gallon federal tax rate) on the price of gas would essentially increase the consumption of gas (because people who weren't willing to buy an extra five gallons a week for $4.00 might buy it for $3.80). The increased demand with an unchanging supply would then cause the price of gas to come back up in order to clear market without shortages. In fact, you might have a temporal increase in both prices and consumption.

Now this whole idea is subject to many other factors too. While it's true, generally, that other actors will increase the consumption of any given good when the price drops for whatever reason, it would have it's limits. High-order goods like gasoline would be especially susceptible to to higher consumption as being able to transport more goods would allow producers to increase output (and profits). But obviously that would only hold true to the degree that such consumption was in line with their productive capacity. You're not going to see a small vendor with three trucks consume thousands more gallons of gasoline in a week all of a sudden, even if they could afford it, because use for that quantity would simply exceed their capacity to provide such services given their limited size. Likewise there is the general argument about the elasticity of any given good (how well market-demand responds to prices). For instance, with gasoline, to a certain extent, high prices are not going to significantly diminish at least a portion of the demand for it. There is a floor-level of consumption to some degree because it's essentially needed for transportation, which is at the root of our productive capacity as a society, even from the view of labor itself.

But given these other factors to consider, the essential economic point regarding supply and demand fluctuations still stand. If some people consume less plastic bags, it could ostensibly decrease the price of plastic bags and simply make it more affordable for others to use it less sparingly. It would seem to me, on an odd level, that there is something almost similar to an externality occurring here in the market; albeit a limited one. It seems that the desired result (conservation of plastic bags in this case) really only occurs when very few of the players have a vested interest in consuming plastic bags, or at least that the non-marginal preference for bags by the remaining consumers has already been largely met. It would appear that as long as demand is somewhat elastic for such a good then it's possible for decreased consumption to result in...increased consumption.

I may be a nerd, but being able to tell someone that their environmental push against the usage of plastic bags may be helping to destroy the planet is about priceless.

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