When the Consumer is King

Consumers reign king these days in the market. They hold alot more power than we know. What they demand, they get. It is the latest evolution of the democratic vote. In fact, using consumers, we can affect how we want firms and businesses to behave. Take the hottest example now, the case of green products. In the past, producers did not internalise the externalities, caused by the huge smoke stacks, pouring industrial waste straight into the lake backyard, etc. But then, consumers did not see the social costs yet, so why should producer care?

But now..now thats a different story. Every firm is fighting to show that it is clean and green. Why? Because consumers are slowly aware of the social costs to these externalities. And consumers are the first ones to internalise these costs once they are apparent. Guess what happens next? Consumers who are wealthy, affluent, and knowledgeable, start to choose green products over unclean products. Well, you would be stupid not to change your strategies, if you were a firm. Large quantities of environmentally conscious consumers can put you out of business, if you pollute the Earth indiscriminately.

So...conclusion? I've just shown how the free market can respond to externalities, without alot of expenditure to alter the price mechanism. All it takes is to correct the information asymmetry. Second conclusion, is that only a wealthy country can have this system of correction in place. If a country is poor, consumers would be too busy worrying about their stomachs than about their environment.

There are problems however, when international trade is brought into the picture. In countries of the less affluent, firms may revert back to the lower costs, pollutive production methods. And they would charge a lower price, creating price discrimination, and problems of dumping. If a firm can produce its goods more cheaply in another country, than it is likely to shift its production to that country. This so far, is the biggest problem encountered in the environmentalist protection. In this case, if we do not want to impose tarriffs, then we must rely on the largest consumer in the world, to demand that these firms behave themselves even in other countries. If US consumers boycott goods that are not 'green', then export firms would again find the incentive to use green production methods again. The most optimisitic point here is that firms would probably bring green technology to other countries.

The free market is powerful indeed. But like the democratic society, it fails though, between the majority and minorities. In this case, the minorities would the poor who have little money votes to make a difference. But the consumers are definitely king. No doubt about that.