Understanding markets with socially responsible consumers

Marc Kaufmann, Peter Andre and Botond Kőszegi

No 411, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Many consumers care about climate change and other externalities associated with their purchases. We analyze the behavior and market effects of such "socially responsible consumers" in three parts. First, we develop a flexible theoretical framework to study competitive equilibria with rational consequentialist consumers. In violation of price taking, equilibrium feedback nontrivially dampens a consumer's mitigation efforts, undermining responsible behavior. This leads to a new type of market failure, where even consumers who fully "internalize the externality" overconsume externality-generating goods. At the same time, socially responsible consumers change the relative effectiveness of taxes, caps, and other policies in lowering the externality. Second, since consumer beliefs about and preferences over dampening play a crucial role in our framework, we investigate them empirically via a tailored survey. Consistent with our model, consumers are predominantly consequentialist, and on average believe in dampening. Inconsistent with our model, however, many consumers fail to anticipate dampening. Third, therefore, we analyze how such "naive" consumers modify our theoretical conclusions. Naive consumers behave more responsibly than rational consumers in a single-good economy, but may behave less responsibly in a multi-good economy with cross-market spillovers. A mix of naive and rational consumers may yield the worst outcomes.

Keywords: socially responsible consumers; social preferences; climate change; externalities; competitive equilibrium; regulation; taxes; caps (search for similar items in EconPapers)
JEL-codes: D01 D11 D50 D62 D64 D91 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-com, nep-env, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Understanding Markets with Socially Responsible Consumers* (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:280964

DOI: 10.2139/ssrn.4671808

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