I am often asked questions from reporters and students alike if there is some special trick, short-cut, rule of thumb or tool they can use to make various decisions. Most often, they ask things like, “if I want to drive a green car how do I know the best one for me?” Or, “if I want to be green in my eating habits, how can I make that choice easily?” And they want to do these and other things without making reference to their iPhone applications, or carrying around index cards or notes or books or anything like that.
So, how do you know if your lettuce is “green”? How can you know how many resources are devoted to the production of your laptop? Economists actually have a very simple answer! We have a trick! It is simple.
Look at the real “price.” Is a price just a sticker? Is it just a way for a seller to gouge a buyer? No. A price represents something very important. When we refer to the word “price” that is merely shorthand for saying, “All of the seen and unseen tradeoffs that you must make in order to make a decision.” That is a mouthful – so we don’t use say it like that. It is very often captured nicely in a simple monetary amount, but there are situations when this price is captured by both monetary and non-monetary considerations (think of applying to get into a good college), or even just by non-monetary considerations (think of the dating market).
Prices only exist because we live in a world characterized by scarcity. Even everything was infinitely abundant (literally – so there is no such thing as crowding or any cost to obtain a good), there would be no reason to allocate goods to different people and uses. But since there is not enough stuff to go around, there has to be some way of conveying this information to potential buyers and sellers. All a “price” is, is a way of representing the fact that there is not enough stuff to go around. Once we understand that resources are scarce, and that lots of different people want them for lots of different things, then we easily understand that these resources need to be priced. A higher price therefore indicates that a resource is relatively more scarce and a lower price indicates that it is relatively less scarce (note that this is separate from the idea of “abundance” but we’ll leave that for another day). Alternately, if you think about the price of a particular good or service, when it is higher that is the same thing as saying, “lots of resources were used up to produce this thing,” and if the price is lower it is the same thing as saying, “not as many resources were used up to produce this thing.” How do we know? Because that is exactly what the price IS.
So if you need a simply rule of thumb, particularly if you are interested in conserving resources, or are wondering how many resources were “used up” (note that this is a silly concept) in the production and sale of that thing, all you need to do is to consider the price! The item/service with the lower price indicates that fewer resources were dedicated to its production than for an item with the higher price. And when you see a price, it reflects not only the explicit resource costs that went into it, but all of the unseen costs that you rarely think about! Prices capture the marginal opportunity costs of producing a good or service – so you don’t need to think hard about all of the millions of things that possibly could have been done with the resources that went into producing your lettuce. By virtue of the thing before you being produced, millions of people acting in their own interest “determined” that this head of lettuce was the best particular use for all of the land, labor, chemicals, etc. that went into its production. And the beautiful thing about prices as they relate to resource costs, is that prices also reflect the decisions, needs, worries, passions, desires, of other people like YOU trying to make the same decision!
If many people are finding a particular product to be “green” and responsible, but sellers choose not to raise prices to them, the sellers are incurring a cost too, no less real than the cost of the materials to go into it. And when prices do go up, it “forces” people to recognize the wishes and desires of others, and allows you to compare how much you value “greenness” or the good in general against other people – far more efficient and fair than if I were trying to allocate the good based on you telling me how much you value the thing.
So do we have a trick? You bet we do! Just look at the price. Prices and prices alone are able to capture the complex web of decisions and resources that go into selling a product, that no simple index card of rules, or book talking about responsible purchasing could ever possibly hope to capture. If there was some problem with a resource (in terms of us running out of it, or it being unhealthy, etc.) that went into the production of an item, it would HAVE to be reflected in the price – unless of course, some “benevolent” third party got into the business of suppressing the information that was contained in prices. But we would never expect that to happen, right? And if it did happen, you would suspect that people would accuse prices of not working, or not conveying the information I am showing you that they convey? No, not at all, right?
Thanks for a great piece!
The USA Today article provided a lot of raw meat for classical economists to chew on. I especially liked the part about not letting food rot in the refrigerator.
[…] it COULD be the case that using these materials is even worse for the environment than CO2. Relying on price signals is a useful way to understand when this might be the case. But anti-capitalists reject the use of prices out of […]
Do you think that if someone tried to develop a theory trying to capture the cost of “being green”, parallel to the how Gary Becker’s developed the “Taste for Discrimination” theory, that they would have any success? Is there such thing as a “taste for environmentalism”?
What I find most interesting about the USA Today article is what it is implicitly saying: “Want to be green? Then spend less money!” Meat is more expensive than wheat. In-season food will likely be cheaper than out-of-season. Driving far costs more. Buying food you’re not going to eat is a no-brainer. The only one that really conflicts is organic food, which has a ton of costs related to meeting stringent (unnecessary) certifications.