Behavioral Nudges in Sustainable Consumption

Behavioral economics combines the fields of economics and psychology to explain the habits of producers, consumers, workers, and investors.  Specifically, why do these individuals make the economic choices they do regarding consumption, choosing labor versus leisure, or choosing investing over saving or spending?  Although many of us would assume that people make economic choices using pure rationality and cost-benefit analysis, this is rarely the case.  Factors ranging from inertia (habit) to social desirability to cultural belonging play significant roles in individuals’ economic decisions.  

Behavioral Nudges Explained

A “nudge” is a design element intended to influence users to select a specific choice, often by guiding their attention.  Sellers use behavioral nudges when designing their websites to guide consumers toward more purchases.  Popular nudges include pop-up reminders, colorful graphics that draw the eye, and using gamification principles to encourage users to complete tasks for digital rewards.  Users are tacitly rewarded for selecting certain options…that are geared toward convincing them to make a purchase.  

Using Default Options to Influence Consumer Behavior

One powerful “nudge” is the default option, which is pre-loaded in the system and requires the consumer to actively select a different option if he or she desires.  Users may accept the default option due to convenience or the acceptance that, because it is the default option, it is better in most circumstances.  Over time, the default option may become the preferred option in many users’ minds, with users believing that the producer, staffed by experts, must know what it is doing.

For sustainable consumption, producers and sellers could make pro-environmental options the default options on their websites.  Even if these options are more expensive, many consumers will accept them.  Some will accept the default simply because it would be more work to select another option, and some will accept the default through the suggestion that it is the best available option.  Others will be persuaded to accept the sustainable consumption options over time if routinely encouraged and incentivized through nudges, using everything from appeal to emotion to the bandwagon effect.

Economics of Sustainable Consumption

Why should consumers be subjected to behavioral nudges to convince them to choose sustainable consumption options?  At first glance, it would appear that most consumers would not choose these options due to additional costs.  However, both governments and private sector companies have incentives to encourage consumers to be more pro-environment.  They may even be willing to subsidize the cost of sustainable consumption choices, making them cost almost the same as other options.

Marginal External Benefits

Sustainable consumption benefits all individuals and not just the producer and consumer involved in the transaction.  Whenever a third party is affected by an economic transaction, we call this an external cost or benefit.  Reducing pollution benefits everyone, thus being an external benefit.  To reach the efficient level of benefit, subsidies should be provided so that the quantity of the benefit provided equals the marginal social benefit (society’s demand) rather than the marginal private benefit (individual producer and consumer demand).  Basically, if it’s good for society, the government should subsidize it to the point of maximum social benefit (where marginal social benefit equals marginal social cost).

These government subsidies would be provided to the seller to offset the cost of offering a sustainable consumption option.  This way, the seller can offer such options for below-market costs, enticing more customers to choose them.  Most such subsidies occur through the tool of tax credits, which allow sellers to receive deductions from their taxable income for offering environmentally sustainable choices to customers.  If a seller helps the environment, there tend to be a number of government programs to help them afford it.

Virtue Signaling and Utility

Some sellers may voluntarily use behavioral nudges to convince customers to select sustainable consumption options, even without government subsidies.  One reason could be virtue signaling as a method of marketing.  Some companies are attractive to consumers due to their social and political stances, including protecting the environment.  Many consumers may be willing to pay a slightly higher price for a sustainable consumption option in order to support a company they feel is ethical.  Thus, being seen as a good corporate citizen can pay for itself in the long run as loyal customers choose to pay slightly more to support their values.

Why do customers pay more to support companies they see as ethical and pro-environment?  Some might see this as economically irrational, as the customers could get the same product for a lower price by simply not choosing the sustainable consumption option.  However, the higher price is rational when you consider that consumers pay for utility (satisfaction) on a regular basis.  If doing something provides you with positive net marginal utility per dollar, meaning it is making you happier to do it (relative to other available options), you should do it.  Many consumers get lots of utility from supporting the environment, and therefore are rational for spending significant money on it.

Lower Resource Costs in the Long Run

Even sellers that care little about virtue signaling and appearing supportive of the environment have an economic incentive to support sustainable consumption: protecting their own access to natural resources.  A large producer that pollutes significantly may eventually find that it has destroyed its own factor markets by killing natural resources and driving away potential laborers.  Therefore, although it costs more money to promote environmental sustainability, a producer will likely find this option preferable to running out of resources.  In this regard, allowing consumers options related to sustainable consumption can be seen as an investment in long-run stability.

In reality, all three incentives likely combine to convince large producers to offer environmentally sustainable options to customers: the government, savvy marketing, and a desire to protect one’s factor markets.  The degree to which companies are willing to offer pro-environmental options likely varies considerably based on many factors, ranging from political control of government subsidies to public opinion about environmentalism to the sensitivity of the company’s resources on pollution.  In recent years, survey data suggest that a significant majority of western consumers support environmentalism, making it worthwhile for producers to offer sustainable consumption options.