Market Failures with Socially Responsible Consumers

Co-authors: Marc Kaufmann, Peter Andre, and Malte Kornemann

Abstract
Many consumers care about climate change and other externalities associated with their purchases. We analyze the behavior and market e↵ects 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 the impact of a person’s consumption on aggregate consumption, undermining the motive to mitigate. 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 e↵ectiveness of taxes, caps, and other policies in lowering the externality. Second, since consumer beliefs about and preferences over their market impacts play a crucial role in our framework, we investigate them empirically via a tailored survey. Consistent with our model, consumers are often consequentialist, and many believe that they have a dampened impact on aggregate consumption. Inconsistent with our model, however, we also find many respondents who expect to have a one-to-one impact on aggregate consumption. Third, therefore, we analyze how such “naive” consumers modify our theoretical conclusions. They consume less than rational consumers in a single-good economy, but may consume more in a multi-good economy with cross-market spillovers. A mix of naive and rational consumers may yield the worst outcomes.