Lousy choices

In a free market, the choices consumers make guide the allocation of the economy’s resources. But what happens if consumers make lousy choices?

The consumer is king. We’ve all heard that. To some, it may mean that front-line salespeople should treat consumers well - that the consumer is always right. But it has a larger meaning too: the consumer’s choices backed by dollars guide producers in their production decisions. If consumers start to buy blue colored refrigerators all of a sudden, then producers will rapidly respond to market signals (e.g. the rising price of blue refrigerators) and produce more of them. That is the beauty of a free-market economy – it is responsive to consumer needs and wants.

But what happens if consumers make really lousy choices? By “lousy choices” I mean choices that are poor or sub-optimal because of a lack of information (or a lack of better information) – where the consumer would make a different choice if they had better information. In those instances, the free market system mis-allocates resources.

So good information is key to good choices, which is key to an efficient market system.

Here’s an example of how better information changes consumer decisions from Wired: Mark Martinez of Southern California Edison placed an Ambient Orb on the desktops of 120 electricity consumers. The Orb is a little ball that changes color: it glows green when the grid is off-peak and electricity is cheaper, and red when the grid is overloaded and electricity is expensive. Within a few weeks he found Orb users cut their peak-hours electricity usage by 40%.

As the real-time price of electricity became more visible, consumers cut their consumption. Better information led to different choices.

Are consumers similarly making lousy choices for lack of better information in other spheres? Are they failing to connect the dots, and making poorer choices as a result?

What would happen, for example, if consumers connected the dots between drinking bottled/canned drinks and traffic jams? Take all the water and soft drinks off the roads, and we might just clear the congestion that chokes our cities. Or what about connecting the dots between all that packaging we buy and pay for at the grocery store, with landfill costs and rising local taxes for the transportation of garbage?

Making those invisible costs visible might change consumer behavior.

But who in the free-market system has an incentive to provide consumers with the information to connect those dots? Certainly not the producers of soft drinks or grocery stores.

Better information would help consumers make better decisions. And better consumer choices would lead to a more optimal allocation of the economy’s resources.

But in a free market system, those with the means to provide such information (marketers, companies) to the consumer often have no incentive to do so, and those with an incentive to do so (environmental activists, regulators, municipalities), often lack the means.

Is there an app for that?

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