In microeconomic theory, negative externalities refer to the situation where the production or consumption of a good or service leads to an adverse effect on third parties not involved in the transaction. Because the free market only accounts for private costs and benefits, the cost borne by society as a whole is not reflected in the market price. The good is, therefore, overproduced, underpriced and overconsumed.
The problem of negative externalities is very pressing today. Climate-related disruptions are becoming harder to ignore each year. We hear of natural disasters like floods, earthquakes, droughts, and forest fires happening more and more frequently. The time for a large-scale, systematic intervention has come. Many have blamed the profit-maximizing ideals of capitalism for our ecological collapse; producers don’t care about the environmental externalities they create because they are not held responsible for their actions, Whether it is carbon-intensive production, overfishing, deforestation, or chemical pollution, our industries are largely unaccountable for the damage they inflict to the environment.
Economists have long wondered how to solve this dilemma: someone has to pay for environmental goods like clean air and water. Firms hold too much power to be forced to change. The government cannot afford to lose the support of large industrialists and does not have the resources to finance the economic transition. Therefore, the answer lies in the consumers. Only a grassroots movement, starting with consumers, can induce systemic change. If households start valuing sustainability in their products, the free market will automatically adjust to meet this demand.
In this context, my research studies the factors responsible for a consumer’s willingness to pay more for an ethically produced good and stay loyal to sustainable brands. The independent variables in the study include demographics like income, age, gender, city of residence, and employment. The dependent variable is the consumer’s willingness to pay more for sustainable goods, which was measured by the respondent’s self-reported answers to various quantitative and qualitative questions.
I used an online survey targeted at Indians living in India, living in major metropolitan cities like New Delhi and Kolkata. There were 121 respondents to the survey. It must be noted that convenience sampling was used, hence, certain age groups and socio-economic classes are more represented in the survey.
Chart 1: The age group 50-60 had the highest number of respondents:
Chart 2: The majority of respondents came from New Delhi
The results are presented in two parts. The positive results indicate that there is room for optimism and that consumers today are truly more likely to pay for sustainability. Negative results indicate that a lot more needs to be done in terms of the sensitization of certain categories of consumers.
Positive Results: The positive results relate to the view of respondents regarding the role of business and the importance of the ethics of a brand in the minds of consumers.
82% of respondents agreed that businesses should have a positive impact on society.
Similarly, 75% of respondents agreed that they were more likely to stay loyal to a brand because of their ethical code of conduct.
Negative Results: The negative results relate to how responsible consumers feel about the political implications of their consumption and their research on the impact of their products before buying them.
While most respondents felt socially and environmentally responsible for the goods they consumed, only 11.6% felt strongly responsible for their political impact.
Similarly, Only about 25% of respondents thoroughly researched the social, environmental, and political harms of producing their goods.
Most respondents were lukewarm about the extent to which they would compromise the appearance or quality of their product to lessen its negative environmental and social impact.
There were several significant results from the survey; we found non-binary and female participants more willing to spend more money on ethical goods. Moreover, Gen-Z participants reported placing lower importance on whether the companies they bought goods from donated part of their profits to charity.
|Variable||Chi-Square Asymptotic Significance||Pearson’s R Approximate Significance|
|Willingness to mitigate harm for lower quality vs Gender||0.327||0.005|
|Business-personal values alignment vs Age||0.722||0.044|
While the majority of respondents in the survey claimed to be fairly willing to pay more for products that are good for the environment, many of those respondents did not reflect this sentiment in the quantitative section of the survey, where they were asked to address how much they would pay for a particular product. Therefore, social conformity bias may influence people’s responses. Most people want to be seen as conscious and trendy, but their actual financial habits do not reflect this. Firms should note that while most customers today are more environmentally conscious than they were a few decades ago, price is still the biggest factor determining people’s spending habits today.