The eternal shock between the multiple economic and political theories, the question of how to do something will always change in the international and domestic scopes. Over the last century, Keynesianism and theories like Samuelson’s theory of pure public goods lived their biggest moments, where intervention was made when someone detected a “market failure”.
However, the economic liberals never stopped developing their theories and debates to show that government failures will always be higher than market failures (when they don’t just assume the market is perfect when left alone).
While this debate is still running, sometimes with governments tending to go more to one side than the other, the environmental problem, which is alienated to our political or economic theories, worsens by the day.
Therefore, even though a neo-liberal can affirm that the greatest source of pollution is the government’s bad management, some market structures show that in a competitive market the invisible hand would not allow a company to try to innovate. Nor be environmentally better than its competitors if it means increasing costs.
The reason for this, is that in a very competitive market, what is the perfect scenario for the consumer is that companies do not hold a big market power. Therefore, in this situation these companies must accept the market price. Accepting the market price means that they can only try to minimize costs to increase profit, hence making it nearly impossible to change to a more environmentally correct production. Converting to an environmentally friendly way of production inevitably makes the price higher.
To exemplify, if a company that operates in a perfect competition wants to change their packaging from plastic to paper (presuming it is better), the company would not be able to do so if it subsequently means going above the market price.
Another example, the figure below shows a perfect competitive market with a horizontal demand curve, that is absolutely the same curve as the price:
The vertical axis represents the price, the horizontal axis represents the quantity to be produced. Let us assume that a product is packed in a material that is environmentally bad represents the price of the product at P1. While using a material that would be better for the environment is represented as P2.
One of the characteristics of the products that operate in this market are that the products do not really differ from one another. Leaving a consumer to ask “Why should one pay extra for the same product?” – Unless they happen to have a moral compass concerning the environment. That is why anyone who sells above the market price (P2) would be ripped off the market, facing a Demand (D) equals to zero.
What to do.
This situation has three groups. Government, Producers and Consumers (us).
A strong decision – Forbidding a specific way of production or material, would be considered very arbitrary. Therefore, governments avoid it.
On the other hand, cutting or decreasing taxes to those who produce packaging in a way to diminish environmental impact would be a direct message to the producers. Also, it would cause the curve of P1 to rise, increasing the costs for those who produce in an environmentally detrimental way.
Companies could invest in practices to achieve a better production method. One of the reasons of packing with materials that are degrading to the environment are that those materials are produced in great quantities. Thus, its production is much cheaper as reason of economies of scale.
* Economies of scale means a proportionate saving in costs gained by an increased level of production.
However, if companies start to produce or even buy raw materials (as a non-plastic package) those other alternatives would start to be produced in a greater quantity. Therefore, achieving economies of scale, diminishing costs and driving curve P2 down on the chart.
Society – You and me
Last, but the most important, society. Markets are formed by the interaction of demand and supply. Companies supply what we demand (especially in competitive markets, where there is no marketing or propaganda).
Therefore, if we stop buying products that are considered bad to the environment, it will be a clear indicator to the suppliers that we do not want it anymore. Suppliers would feel it in their pockets and stop (or diminish) the supply of those products.
How to make it? Simple. Even though this market is formed by companies with small market shares, some companies do have a bit more of market power than others. They may offer products in both positive and negative to the environment. Let’s take ketchup for example. Think of the bottle of Heinz tomato sauce in your fridge.
Some companies – the biggest usually – often package ketchup in plastic and glass. However, for reasons already mentioned, plastic is the cheaper option. If we stop buying plastic packaged tomato sauce (considering that glass is better to the environment than plastic), suppliers will eventually reduce the production of plastic based ketchup and increase the production of glass products. With time, glass products will achieve economy of scale and become cheaper.
In the meantime, we must make a small sacrifice at the beginning – paying that little bit more for the same product – to deliver our message.
Finally, keep alert. In some cases – like oatmeal – paper packs are already cheaper than plastic. Making it more expensive to consume it.
Credit: Victor Maldonado – Economist
Source – The Figure Head