16328_5.30_000005892390XSmall

Green Elasticity

Apr 23, 2011 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Government, Households, Thinking Economically • 236 Views    No Comments

Sales of Nature’s Source Scrubbing Bubbles tub have plunged by 61%. At Stop & Shop, “Eco-friendly” people are switching from Clorox Green Works All-Purpose Cleaner to traditional Fantastic. Why? Because Fantastic is 40 cents cheaper. According to the NY Times, “…if it’s one or two pennies in price higher, they’re not going to buy it.” Only green brands with a more affluent customer are not experiencing a similar decline.

Food columnist Mark Bittman has a suggestion. Focusing on food, he says the US government should subsidize organic, small farmers who sell directly to customers. The result? “Green” products will be cheaper. Should we take this a step further and propose green subsidies for household cleaners. And maybe, still, a step beyond that and raise the tax on gasoline so that we conserve energy?

Your opinion?

The Economic Lesson

With incomes falling during the recent recession, the green response has been elastic. Called the income elasticity of demand, we tend to buy less of certain products when our purchasing power decreases and more when it rises. For other products, our quantity demanded is inelastic because, as with medication, quantity demanded changes less. 

With gasoline and price subsidies, an economist would take us to the price elasticity of demand. Here, the principle is the same as with income but instead, the price is the key variable affecting how much we buy. When price changes have a large impact on the quantity we demand, then our demand is elastic. If our response to price change is minimal, then our quantity demanded is inelastic.

Should government policy use our demand elasticity to influence our buying decisions?

Related Posts

« »