Ethics/Tastes

1. Ethics/Tastes Handbook Ch 19

2. Public Goods • Public Goods are defined by two characteristics • Non-excludability: once the goods are produced, there is no way to exclude anybody from consuming them. • Non-subtractability(non-rival): once the good is provided it is not depletable.

3. Examples • Lighthouses • National Defense • Radio Signals • Clean air • Street Lights • Flowers in window boxes • Examples of Public Bads • Pollution • Species Loss

4. How is this related to Food Consumption? • If, when you purchase organic produce, there are fewer pesticide poisonings of birds etc • This generates a public good • Everyone who cares about birds benefits • The happiness you receive from the reduction in dead birds doesn’t reduce anyone else’s happiness from that same outcome

5. Question • If • there are external benefits from your public-good provision • and you can’t capture these benefits • Will private consumers provide enough of the public good?

6. Public Goods Experiment Note: while we will announce how much each student earns from asset B, we won’t announce Asset A investments/rewards (i.e. so your choices in this experiment are semi-confidential) • By showing up for class today you each receive 1 “point” to invest. • You will invest your 1 point across two assets. • When you “invest” your point you lose it, but you reap repayment as follows. • Asset A generates a private return only, returning to the investor exactly what she invests in it. • E.g. Suppose each student in the class invests only in Asset A. Then each student will obtain a “return” of exactly 1 point. • Asset B generates only a public return, but pays out double the investment divided by the number of students in class. • For example, if there are 40 students in class today and each invests her entire point in Asset B, then each student would receive 40x[1 x 200%]/40 = 2 “points”. • In contrast, if 39 students each invest their full point in Asset B, and one student invests her entire point in asset A, then the 39 “civic minded” students would receive 39 x [1x200%]/40 = 1.95 points and the one “self-minded” student would receive 1 + 1.95 = 2.95 points. • You may divide your point between the two assets in any way you choose. How much of your 1 point do you want to invest in: Identitier: _______________________________

7. While we are waiting for Jenni to calculate how many participation points you each get…

8. My speculation • Most of you will give somethingto the public good (B) • Some of you will give nothing to the public good • The average points awarded will be less than 2 points • i.e. the public good will be under-provided • Update: • Each student present in class earns XXX points from Asset B. • XXX students each allocated his/her full point to Asset B.

9. How does society usually provide public goods? • Sometimes governments get involved • Mandate private provision • You must shovel your walk within 24 hours of a snowfall • Tax citizens and then uses revenues to pay for provision • Defense • Lighthouses • Libraries • Actually an example of a “club” good since libraries are “excludable”

10. If policymakers cannot reach consensus regarding public provision, private provision is sometimes relied upon • Donations (as per our experiment) • Lighthouses • are classic examples of pure public goods, however throughout recent history there have been many publicly provided lighthouses • are likely to get sufficient provision even if relying on private market if satiation occurs at a finite quantity, private benefits are high and provision costs are low • Green markets • Individuals pay a price premium for “impure public goods” • These are products that bundle private and public attributes • E.g. low carbon rose • Public attribute: fewer emissions/rose • Private attribute: a pretty flower Image copied from Scientific American

11. Green Markets • Some consumers are willing to pay a premium for goods that provide a public good • Whether a product genuinely provides a public good is unobservable • “credence” attribute

12. Creates a role for labels confirming credence attributes • Examples of voluntary labels • Organic • Dolphin Safe Tuna • Fair-Trade

13. What’s the value of the label? Figures 19.1 & 19.2 in Handbook

14. $ MPCB = SB Suppose there is an old, established (and Benign) production process with marginal cost give by MPCB = d+DQ d Q

15. Consumers $ SB • Suppose there are two types of consumers • A Type 1 individual i has individual demand MWTPi=a-bqi • From the Handbook (although you don’t need to know / understand / remember this to work with the graphs): • Let βmeasure fraction of the population that is indifferent • Convince yourself at home that if Q is the total amount consumed by the population, then the (aggregate) inverse demand from type 1s will be P1D=a-bQ/β • Draw this demand curve as D1 a d D1 Q

16. Similarly… • A Type 2 individual j has demand MWTPj=a-rI-bqj • where • r measures disutility from “bad” product attributes • I is an indicator variable = 0 if the product is benign = 1 if the product is harmful • If the product is produced benignly, then (aggregate) inverse demand from type 2s will be P2D=a-bQ/[1-β] • Depict this with D2

17. $ SB a d D2 D1 Q

18. $ SB • The economy’s collective aggregate demand will be D1+D2 a D1+D2 d D2 D1 Q

19. $ SB • Equilibrium price will be PB • Total quantity consumed will be QB a PB D1+D2 d D2 D1 Q QB

20. $ New Process SB • Suppose a new, controversial process comes along • Associated marginal cost MPCN=c+CQ • Where c<d, C<D SN d c Q

21. Recall there are two types of consumers • Type 1s doesn’t care how the good is produced so their inverse demand curve is unaffected MWTP1=a-bQ/β

22. $ • Type 2s get negative utility from consuming the new technology, and so • their demand falls to MWTP2N=a-r-bQ/[1-β] SB a Note that the Aggregate Demand Curve Changes too; it’s now represented by the red line (which we’ll ignore in the graphs that follow). SN D1+D2 ~ d D2 D2 c D1 a-r D1+D2 Q

23. Without an eco-label or third-party certification scheme, producers can’t credibly convey to consumers whether they are still using the old technology B • So all producers switch to new technology • Knowing that all producers are using the new technology, demand from type 2 consumers drops to D2

24. $ See market price fall from PB to PN quantity consumed falls to QN SB a SN PB PN D1+D2 ~ d D2 D2 c D1 a-r QN Q QB

25. $ SB • Type 1 (indifferent) consumers gain CS (pink) a SN PB PN D1+D2 ~ d D2 D2 c D1 a-r QN Q QB

26. $ SB • Type 2’s effectively exit market, losing CS (yellow) a SN PB PN D1+D2 ~ d D2 D2 c D1 a-r QN Q QB

27. $ Notice that even producers might be hurt SB • Green = PS before innovation • Blue = PS after innovation a SN PB PN D1+D2 ~ d D2 D2 c D1 a-r QN Q QB

28. Policy Options (Handbook section 3.2) • Ban the new technology • Indifferent consumers forego their increased CS (pink area) • Concerned consumers regain their previous CS (yellow) • Should the government do it? • If a ban is the only option and yellow + green area is larger than pink + blue, then yes

29. Alternative (Handbook section 3.4) • Government (or an independent third party) could solve the information asymmetry by certifying producers who use the benign technology.

30. $ • Indifferent consumers can still choose to purchase goods produced with the new technology • Enjoy price PN • Concerned consumers can now purchase QR benignly produced products at price PR SB a SN PR PN D1+D2 d D2 c D1 QN Q QR

31. $ SB a SN PR PN D1+D2 d D2 c D1 QN Q QR

32. $ SB a SN PR PN D1+D2 d D2 c D1 QN Q QR Note for the keen: MPC of producing benign and new goods shouldn’t be treated as independent

33. To complete the analysis… • When calculating total benefit, make sure to subtract the costs of labeling and managing the certification scheme

34. Complications

35. Errors • What if there are type I and type II errors in the certification process? • Type I error = false positives • Some firms that aren’t actually following organic practicies get falsely certified • Example • BC sockeye fishery has received Marine Stewardship Council’s certification as “sustainable” • http://www.theglobeandmail.com/news/british-columbia/sustainable-sockeye-eco-fraud/article1212194/ • Type II error = false negatives • A firm with a low-carbon footprint doesn’t get labeled as such because of coding error in the input-output tables

36. Un-Certified Firms • Just like there might be some firms that are certified undeservedly… • Some firms that should qualify might eschew certification entirely • Too small • Not enough units across which to ammortize certification costs • Negative market effect • Delmas& Grant 2010 • Did hedonic analysis of 1000+ wines • Found that labeling a wine as eco-certified lowered the equilibrium price by 20% • Even when controlling for quality as measured by Wine Spectator score • Explanation: • consumers who only care about the taste of wine might infer that part of the price charged for a certified organic wine reflects additional costs of producing organically, and thus the price:taste ratio is too high

37. Confusing Labels • When rely on third parties to certify products, may get label proliferation • Too many labels, each representing something different • Consumers get confused • Brand and label similarity • Information (over)load • Ambiguous Information • Handbook claims 200+ different eco-labels in the US alone • Some very vague • Imprecise labels • “tarnish the credibility of well-defined labels that follow diligent procedures of meaningful product and process definitions” (Handbook p.511)

38. Let’s look more closely at a particular kind of label

39. Fair Trade • idea: make sure that producers get a “fair” portion of retail price • common products: • “handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, chocolate, flowers, and gold.” (Wikipedia http://en.wikipedia.org/wiki/Fair_trade) • to get Fair Trade Certified, production and distribution need to be audited by third party certifiers

40. Suppose there is no Fair Trade Label $ MPCFarmer Pw/o Dw/0 Q Qw/o

41. Suppose a third party introduces a Fair Trade label • Labeled goods cost $x more per unit • Assume all of the premium paid goes directly to farmers • If concerned consumers fully internalize the benefit to the farmers, then their WTP rises by $x/unit as well $ MPCFarmer + x MPCFarmer $x Pw/o DFT=Dw/o + x $x Dw/0 Q Qw/o

42. What do we see? • Consumer price rises to PFT = Pw/o + x • CS stays the same • Farmers’ Surplus rises by x*Qw/o • Win-win • (actually, win-neutral) $ MPCFarmer + x MPCFarmer $x PFT Pw/o DFT=Dw/o + x $x Dw/0 Q Qw/o

43. In reality • Farmers typically receive far less than the premium paid • Three reports find little of the “Fair Trade” premium trickled down to producers • Valkila, Haaparanta and Niemi (2010) • “consumers in Finland paid considerably more for Fairtrade-certified coffee than for alternatives, but that only 11.5% of the extra paid went to the exporting country.” (Griffiths 2012 p.359) • Kilian, Jones, Pratt and Villalobos (2006) • “US Fairtrade coffee [gets] $5 per lb extra at retail, of which the exporting cooperative would have received 10c, or 2%” (Griffiths 2012 p.359) • Mendoza and Bastiaensen (2003) • “calculated that in the UK only 1.6 to 18% of the extra charged for Fairtrade reached the producers for one product line“(Griffiths 2012 p.359) • “Calculations from figures produced by FairtradeLabelling Organizations International (2010) • show that on average 1.53% of the retail price reaches the Third World as extra payment from Fairtrade membership” (Griffiths 2012 p.359)

44. Are Fair Trade Products still welfare improving if there are large intermediary costs? $ • Suppose that transactions costs associated with a Fair Trade Label are $y/unit • Equilibrium price= PFT’ • Equilibrium quantity = QFT’ MPCFarmer+y+x $y MPCFarmer+x PFT’ $x MPCFarmer PFT Pw/o DFT = Dw/o+x $x Dw/0 Q Q QFT’ Qw/o

45. Look at Farmer’s Surplus $ • Change in Farmers’ Surplus =[d+c+n]-[m+n+o] • Because the MPCfarmer+y+x curve and the MPCfarmer curve are parallel, then d+c=m • Thus change in Farmers’ Surplus is n-n-o= -o < 0 • Farmer’s are worse off • because they are selling so much less MPCFarmer+y+x a $y MPCFarmer+x b PFT’ c d e h f $x g MPCFarmer PFT k s j i r Pw/o m o n DFT = Dw/o+x $x Dw/0 Q QFT’ Qw/o

46. Consumers? $ Change in CS =[a+b] -[b+d+f+g+i+j+r] = a -[d+f+g+i+j+r] If yellow < pink then consumer welfare falls too MPCFarmer+y+x a $y MPCFarmer+x b PFT’ c d e h f $x g MPCFarmer PFT k s j i r Pw/o m o n DFT = Dw/o+x $x Dw/0 Q Q QFT’ Qw/o

47. Sometimes, instead of labeling products as ethical, we ban products that are offensive to some fraction of the population

48. Foie Gras • “fat liver” (french) • duck or goose • standard method • “gavage” • force feed bird by forcing a tube down bird’s throat

49. Foie Gras bans • Chicago (2006-2008) • California • gavage criminalized---as well as import of livers resulting from gavage---as of July 2012 • Gavage • legal in Canada • banned in Israel, Argentina, Czech Republic, Denmark, Finland, Germany,Italy, Luxembourg, Norway, and Poland

50. Extenuating Circumstances • Ducks and Geese don’t have gag reflexes • “...have sturdy throats that easily tolerate grains, grit, stones and inflexible gavage tubes.” (DownesNYTimes2005) • “I visited Hudson Valley Foie Gras last week, seeing gavage for the first time. I saw no pain or panic in Mr. Yanay's ducks, no quacking or frenzied flapping in the cool, dimly lighted open pens where a young woman with a gavage funnel did her work. The birds submitted matter-of-factly to a 15-inch tube inserted down the throat for about three seconds, delivering about a cup of corn pellets.” • (Downes 2005) • Judge for yourself: • https://www.youtube.com/watch?v=lh6ZDusOGwU • Instructor link