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Belief economics - changing price elasticity to make pricing more effective

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James Atkins

Aug 28, 2012
06:04

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Often I have the feeling that carbon pricing or taxes aren't effective enough. Like, if we are really addicted to oil (and the lifestyle which it allows), then you have to rack the price up hugely if you want to get people off their addiction. And with a scheme like the EU Emissions Trading Scheme the price impact on fuel costs is not high enough to have any effect on consumers' behaviour (or even industry's behaviour). Moreover, it's almost a rule that if the price is high enough to have an effect, then it becomes politically unacceptable. You have to be careful about making big price changes in order to change behaviour. So is there a way to make small price changes more effective? The degree of response to price changes is called the price elasticity of demand. Like: how much does demand change based on an small increase or decrease in the price of something? Price elasticity of demand for a product depends on a bunch of things including what alternatives are available to that product and, critically, HOW MUCH we want that product. So if you could weaken people's desire for a high-carbon product, then perhaps a smaller price increase would be enough to trigger them to move to a low-carbon product. This makes me think that it might be worth putting a lot of effort into researching "How do you increase price elasticity of demand for high carbon products and services" in order to make carbon pricing more effective. Oh, and then "How do you do that ethically?" Because it creeps towards social engineering which some people don't like so much.

James Greyson

Aug 28, 2012
08:16

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Great discussion - thanks James. Does it help to consider how big price changes in oil (due to rising demand etc) haven't changed consumer behaviour? We just pay more and keep going. I wonder if this inelasticity of a micro-price signal is connected with the absence of reliable macro-signals that society is really changing? In the UK we have an MP responsible for climate change calling for more airport runways and locally we have shrinking bus services and new investment in resource incineration rather than recycling. So maybe the elasticity/behaviour change question is not so much about the level of the price as the shifting of funds between options, such as from fossil fuels to renewables and public transport?

James Atkins

Aug 28, 2012
10:08

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I am thinking specifically about the choices of normal people in things they do every day - what purchases they make and what things they do. Yes, oil prices is a good example. At a certain level they do cause personal car use to drop off. But perhaps by changing people's view of the world the drop off in car use could occur at a lower oil price. It sounds a bit flaky, I guess, but it's just a question of analysing critically the factors which shape price elasticity, which is a conventional economic notion. I think that the daft decisions made by politicians is another problem (failure as agents because of greed, corruption etc; the problem that the skills needed to win an election are different from the skills needed to govern; and so forth).

James Atkins

Aug 28, 2012
10:03

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If we modelled the "belief" factor in price elasticity (or, aside from price elasticity, people's beliefs generally and their impact on choices), then we might see what effect changes in belief have on emissions and the economy. The next step would be to understand much better the technology (in a broad sense) of "how to change people's beliefs in an ethical way". I think at the moment we understand this fairly poorly. We have been educating people for hundreds or thousands of years but still have problems with the output. It might be that small improvements in this technology could have a big impact. Then it might be that the marginal abatement cost of this technology would be lower than the marginal abatement costs which are calculated in conventional marginal abatement cost curves which focus on the costs of installing different kinds of machines for saving or generating energy.

Dietram Oppelt

Aug 29, 2012
05:53

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James, some thoughts (with the support of wikipedia on what influences price elasticity) - duration: if you believe price changes will last you will adopt your behaviour. just met the techical representative of large corporate supermarket chain in a developing country. Corporate headquarter "obliged" all subsidiaries globally to mitigate CO2eq by 2030 by 50% and 2050 by 100%. Why? It pays long term to be a leader. it pays out long term. - availabiliy: if you have the perception the substitute is easily available you will go for it. for long time no one thought of changing it energy supplier in Germany. After Fukushima there was a migration wave to renewable energy. The easier on can figure out the alternatives on the net, the faster the change.. - who pays: if the company pays the price does not matter so much. Many German corporate citizen drive big cars. Company pays therefor the price and the carbon consumption does not matter. Grossly wrong. Much better if companies would by 100% public travel cards including bus, train, ebike etc. Much more value for the people (here government needs to act and power of large car companies in Germany and elsewhere to be broken). - brand loyalty: if you love the brand you will buy whatever the price is. Create other benefits associated with the brand (quality of life) which come along carbon saving. I.e. Germans love (healthy) locally grown "bio" food. Bio became a brand label across different stores. Consumer facing companies have a great chance to embrace (the growing number of) low carbon citizens (and create brand loyalty among them), i.e. low energy houses in Germany, Green Electricty; another idea is labelling and naming/shaming the "evil" i.e. what is done on cigarette packaging, could be done on fossil fuels when filling your care with fuel, meat from animals in mass keeping (i.e. on the menue of restaurants similar to showing ingredients like phosphor). Naming and shaming bad brands can also help a lot, like Greenpeace is doing big scale with Gazprom, Nestle, VW, ... - necessity: if you really need something you will by at whatever the prices is. (In theory) with the EU emission trading system. Companies need to meet their - decreasing - carbon allowances.

James Atkins

Aug 30, 2012
08:01

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That's great Dietram. Thanks for that. So ... each of these elements is worth looking at, and have different characteristics... Perhaps the duration bit is connected with how credible you find the tax or the scheme. So if you think that the government is not so serious and will reduce the tax or loosen the cap, then you don't feel the need to switch away.. Availability - yes, that's a lot about making low carbon alternatives available. I see it as a supply side measure, because it's about helping developers of low carbon technologies, products, and services. But it is also about the demand side, because sometimes stuff is available, it's just people don't know that. e.g. the public transport system in Budapest is great, just lots of people don't know which buses or trams go when. The who pays is like a string which needs to be unravelled: the polluter should pay. That should be relatively easy to solve by regulation, I think. e.g. there's the problem with people saving energy in rented offices. The property owner is not interested because the tenant pays the bill; the tenant isn't interested because he is only there for a year. But that should be relatively easy to address, I think. Brand loyalty and "necessity" are interesting ones which can be dug into. Brand loyalty is so much about what is going on in our minds. "Necessity" is quite a lot about that, because we think things are necessary when they aren't really e.g. people "need" a freezer, when in fact it's possible to work around it; or they "need" a car, when in fact they could manage without. So "necessity" is a very flexible notion. So I'd say that a good chunk of the drivers of elasticity are psychological and on the demand side (brand, necessity to some extent, knowledge of availability), some are to do with the supply side (availability), and others don't obviously fit into such a category (e.g. "who pays"). It would definitely be worth digging deeper into this topic, I think, and trying to understand how solid or how fragile the demand curve is. I think a great experiment would be eating meat and dairy, and this is something the boffins at MIT might be able to do. You get 60 people who regularly eat meat and dairy and know what they pay. Then 20 of them you (somehow) subject them to a 10% increase in meat and dairy prices. The second 20 you subject to the same increase in meat and dairy prices AND you show them the Philip Wollen and Gary Yourofsky youtube talks. The third 20 you subject to the videos but not the price increase. Observe and record their behaviour, and you can measure how the price increase or the belief change affect demand, separately and together.

James Greyson

Aug 31, 2012
05:58

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Thanks - enticing ideas shaping up! Wondering how many of your elasticity 'chunks' could be tied together - for example by polluter pays initiatives funding supply availability initiatives, which shifts the psychology of necessity. Would you like to propose that someone does something with price elasticity? Perhaps in the local actions contest?

Dietram Oppelt

Aug 31, 2012
06:21

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James - like your specific proposal "to try it out" with peer groups. One idea to add to this - availability: there was a test done before with conferences. Conferences "normally" offer 80% meat and 20% veg on the menu card. For the test they changed it to 20% meat and 80% veg. Choices switched accordingly (quoted in Nature Climate Change). One could think how a contest needs to be shaped to have it as a starting point of a business model for multiplication..

James Atkins

Aug 31, 2012
10:29

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What if they devised some tests at college canteen? Playing around with the prices of meat dishes. Placing vegan videos on screens in the queue at the canteen. Perhaps we can crowdsource some tests of comparing and stripping out the relative effects on demand of changing prices and of marketing / education / propaganda efforts. Well, perhaps it's all been done already just we don't know! Usually if you think of something it's already been done, after all.

Dietram Oppelt

Aug 31, 2012
11:10

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good idea - the contest can be about setting the plot of the "tests" and collecting all papers, previous experiences for a proper test design and evaluation. Can MIT host it?

James Atkins

Aug 31, 2012
12:24

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This would be great. The best tests could then be tried out as research projects for students. In the end we'd hope to be able to see whether changing beliefs can or cannot "supercharge" the impact of price changes on demand.

James Atkins

Aug 31, 2012
12:43

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And if they can, then the research moves on to understanding better how to change beliefs in an ethical way and measuring the cost of these.

James Atkins

Sep 1, 2012
06:28

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so there is loads of work done on areas like consumer psychology and behavioural change etc (eg http://www.consumerpsychologist.com/cb_Attitudes.html) and whole academic disciplines devoted to it. people say: "its very hard to change people's attitudes or their beliefs". But does that mean it's not possible or "very" expensive, or we don't yet know how do? And how hard or expensive is it compared to changing technology? We know how much a windmill costs or a solar panel or a bus. If you could say "it costs $15 per ton to cut emissions by changing a belief and only $8 by changing technology" then you could reasonably prefer a technological approach, then you could reasonably prefer a policy based on technology. today we adopt policies that divert billions into technology change without knowing whether or not that is cheaper or more expensive than belief (or attitude) change. or: perhaps we do not that, just it's not really discussed much, in which case, apologies!

James Greyson

Sep 19, 2012
06:33

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Great discussion! The MIT Climate CoLab can host proposals for what to do about climate change. A proposal for research on changing beliefs would be a 'social action' that supports subsequent 'physical actions' to directly cut/absorb emissions. You can also use a proposal to crowdsource content for a proposal that you'd like to shape up together with others from around the world. You might like to check out for example the 'local solutions contest' at https://www.climatecolab.org/web/guest/plans/-/plans/contestId/13 Please yell out if you need any help. Thanks, James

James Atkins

Sep 28, 2012
08:36

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James, I will think through this and see if I can create a proposal for this space. "Changing people's beliefs ethically" appears like a huge challenge, but it might just happen to be cheaper than building windmills.
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