Market-Based Environmentalism

May 27, 2008 by

While many environmentalists have talked to “saving the Earth” and “reducing pollution,” for some people, the greatest motivation is the almighty Dollar. Perhaps, the key to encouraging more people to make environmentally friendly changes is to unbundle the costs of consumption. However, when doing so, it is important to not merely use unbundling as a means of passing along price increases, as if that is done, it has the potential to lead to backlash.

At 7-Eleven convenience stores, customers can save money by bringing in their mugs or Slurpee cups for refills. Refilling a 22 o.z. durable Slurpee cup costs $0.95 in Philadelphia, while purchasing a similar beverage in a disposable cup costs $1.19. By providing customers with over a 20% savings for making an environmentally-friendly choice, 7-Eleven allows its customers to benefit from their behavior. Had 7-Eleven not passed along the savings, customers might experience decreased utility from bringing their own cups due to both the inconvenience and washing required, and may have been less likely to do so. 7-Eleven benefits from this policy, too. Given that the actual cost of the product is rather low, the cost of the cup may be near the size of the savings passed along to the customer. The true cost of the cup should be considered to include the cost of its production, its transportation to the store, and of the labor involved in stocking it in the store. By encouraging customers to bring their own cups, 7-Eleven also reduces the chance that it will have a “stock-out” and have no cups available, resulting in lost revenues.

American Airlines recently decided to charge passengers a $15 fee for checking one bag. While this may also follow the principle of market-based environmentalism as planes with less cargo require less fuel, it is likely to be viewed far more negatively, as it is being cast as a loss, rather than as a gain. Kahneman and Tversky showed that people experience more disutility from losses than they experience utility from gains of the same size. If American had raised its prices, but then provided $15 rebates to passengers checking no bags, the policy might have been viewed more positively. However, American likely chose not to do this, as people typically compare ticket prices among airlines, but not the “Total Cost of Ownership” (which in this case would include the baggage fee).

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