Wednesday, May 07, 2014

Addiction To Consuming As A Market Failure

Various things have been identified as market failures - that is, their existence causes the free market not to work as efficiently as it is touted.  I've written about some in detail in
Capitalism v. Democracy: Why The Free Market Needs Government To Work.

The one that people who have taken economics tend to remember is 'externalities.'  These are costs to society that the manufacturer doesn't have to recover in the price because they don't pay them.  Pollution is the general example.  Thus their product costs them less than it really costs, because they don't pay the full costs.  The rest of us do in additional health care, in pollution clean up, in chemicals showing up in our food, etc.  

It's why the Citizens' Climate Lobby wants a carbon tax.  It will raise the cost of carbon based products to reflect the externalities and thus make non-carbon alternatives comparatively less expensive.  

But I want to talk about addiction itself as a market failure.  

Markets are supposed to work when there is a knowledgeable buyer and knowledgeable seller, both of whom can walk away from the deal if it isn't a good deal for either of them.  The buyer can say, sorry, that price is too high, I'm not buying.  And the seller won't lower the price past a certain point.  

But what happens if consumers are addicted to a product - say like heroin?  There is no price too high.  Or gasoline?

Those are easy examples.  

What if Americans are simply addicted to consuming?  

They sort of look at prices (that's why most places always have 'sales') but they believe they can't live without the product?  Or they have so many sunk costs in the product that they can't give it up and so they can be continually seduced into buying updates?

Cell phones.  Why is service so expensive?  Because people simply pay whatever is asked. 
Credit card and other bank fees and interest?  Even with newish credit card reform, there are still lots of problems.
What about computer updates?  After a while you have to get the new software because your old software no longer works, or is maintained.   
Or you have no option to buy a car without automatic transmission and windows and door locks?

When the buyer is no longer paying much attention to price, and buys regardless of the price,  or has no choice but to buy features she doesn't want or do totally without, the basic mechanism that's supposed to make the market efficient breaks down.  And I think we're pretty much there these days.  (Think of all the people who can't live without a smart phone.  Or their daily lattes.)

OK, this is just a thought that popped into my head and I haven't fully thought it out or looked to see if someone already worked this out more.  But I'm jotting it down so I don't forget. 

[Of course, I can't post something like this without googling.  There are lots of hits for "addiction as a market failure"  but they seem to be specific - tobacco, gambling, oil* - but not generalized to addiction to consuming itself.  

*the word addiction is in footnote 17


  1. Back in the 40's my great grandfather (Bernard London - NY developer, entrepreneur, and engineer.) helped create the concept of Planed Obsolescence. He wrote several books on the subject that were very well received at the time. This marketing concept was the baby that grew into the monster of the Consumer Economy. WE MUST BUY - and keep on buying.....even if we don't need it, even if it is detrimental to our health and wealth. My GGF is rolling over in his grave about the perversion of his concept as he was a conservationist and very much believed in caring for our environment and social equality. One day I hope to write a book about this man......

  2. Hedgewytch - There's lots on this blog, so I don't know if you've ever looked at the posts on Victor Lebow and his Story of Stuff quote. It's one of the most visited posts on this blog and has the most comments. Perhaps Lebow and your grandfather knew each other.
    Victor Lebow's Complete Original 1955 Article


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