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Wal-Mart or Walmart offers everyday low prices. They're obsessed with offering the lowest price, and we, the consumers, let them do it, obstensibly for our welfare. But that's just our consumer welfare we're dreaming about. Society welfare suffers as more people lose their jobs because lowest price products must be outsourced abroad. Opting for consumer welfare over society welfare all the time on a blind basis is outsourcing yourself out of a job.


 
Home / Economics /
The Tradeoffs Between Consumer and Societal Welfare
Walmart and Wal Mart

Should we really be relaxing?  The lowest prices can have devastating consequences on societal welfare.


I remember walking out of a Wal-Mart about 15 years ago and extrapolating what the company's staggering growth meant for our future.  Back then, there were less than 2,000 Wal-Mart stores in the United States.  As of August 2008, there were over 4,200.  

This entry is not a tirade against Wal-Mart.   Wal-Mart, as a behemoth everyone is familiar with, just serves to illustrate my point.  Wal-Mart grew at such a phenomenal rate because consumers lusted after "everyday low prices."  Little wonder.  More than half of these steady customers have an income below the American national average.  Can you blame these guys for trying to save a buck?  For that matter, can you blame anyone for trying to conserve his cash?  Rich people who got rich without inheriting a trust fund are quite familiar with the value of money.  They've spent their time amassing it.  Why should they spend $100 when they can get the same basket of goods for $75?  

People shop at the lowest cost provider to improve what I call their consumer welfare.  By saving money, they have extra money to purchase additional items, save, or invest.  So what's so bad about lower prices, you might be asking?   Nothing a lot of the time.  Back in 1980, a 19-inch JVC color television set cost $560 (about $1,400 in 2007 dollars).  Today, that same $1,400 would buy you a 50-inch plasma widescreen television that would put that 1980 set to shame.  When my father brought home one of the then slick Apple II+ computers in 1980, he had to plunk down $2,500 (about $6,300 in 2007 dollars).  You can buy a decent desktop today for less than $500, a more than competent laptop for less than $1,000, and if you want to still stick with Apple, a Mac Powerbook with a 17-inch screen for $1,300.  In real terms, people have more money in their pocket today after buying a state-of-the-art television set and a computer than they ever did in 1980, a significant consumer welfare gain.

Here's the difference.  Technology brought about those price savings and performance improvements, and everyone in society benefited.  In 1980, only wealthier families had computers and video cassette recorders in their homes.  They were considered luxuries. As technology lowered the cost of production as well as improved performance, these items ceased to become luxuries.  More families could afford them.  Societal welfare increased alongside consumer welfare.  

Some would argue that everyday low prices improves societal welfare, too, but I don't agree.  Saving a buck or two on a shirt or a book or a jar of pickles doesn't benefit society as a whole.  And there are hidden costs.   A giant like Wal-Mart is ruthless with its suppliers.  This is good in that it forces those suppliers to streamline their production and manufacturing processes, eliminate the wastage.  It's bad in that these suppliers can be squeezed so hard that they are forced to outsource production and lower quality.  

During every presidential election, the candidates promise to create more jobs and stem the tide of outsourcing, like outsourcing is some sort of evil that threatens the foundations of our economy.  Outsourcing isn't evil, unless evil means getting your television set and iPod and tennis shoes at everyday low prices.   Outsourcing is a tradeoff.  How can we, on one hand, be so ruthless in our quest for the lowest prices and, on the other hand, not expect that low costs come at a price?  If we want things priced so low, then suppliers have to cut their costs, and in order to cut their costs, they have to relocate some or all of their operations offshore to low-wage countries.  In an ironic twist, the shoppers most likely to go to a Wal-Mart to save money are the ones most likely to have their jobs evaporate offshore.  

By insisting you get your padlock for $6 instead of $9,  you are improving your consumer welfare, but because the lower pricing of the locks isn't predominantly achieved through technological improvements, but outsourcing to lower wage countries, you've 'borrowed' that consumer welfare gain from the societal welfare pool as domestic jobs are lost and people unemployed.   Unemployment and dislocation are a definite cost to society.   I wouldn't say you borrowed the full $3.  Some of those displaced factory workers who used to make your $9 locks will find other, more productive jobs.  

Wal-Mart isn't the problem.  If Wal-Mart disappeared off the face of the earth tomorrow or never existed, the Costcos, Kmarts, Home Depots, and Targets of the world which remain, in whatever countries they're doing business in, would carry on the same practices.  We're the problem.   These retailers are just giving us what we want.   We made these companies the giants they now are with the power they now have.  We are the ones who shopped there, who bought their stock, and paid no regard to the societal welfare tradeoff.

Our governments aren't blameless either.  We've passed laws in our own countries that guarantee a minimum wage, pollution standards, restriction on child labor, and the like.   Adhering to these laws costs money and raises the costs of production.  But then we're willing to import from countries which conform to none of these rules.  A law forbidding trade with countries that don't obey a list of common humane rules wouldn't work unless every country in the world adopted it.  What would be the point of the U.S. prohibiting imports from sweatshop countries if the European Union, Hong Kong, Japan, and the rest of the world continued to accept them?  We would just wind up importing the sweatshop products via a third country.  

At this point, it's too late to opt for the more expensive product that might preserve societal welfare.  (Always buying the more expensive doesn't necessarily mean a societal welfare improvement).  First of all, even if people were to understand the societal welfare tradeoff, they wouldn't exercise it.  Their first instinct would be to save money no matter what and pass the burden on to other consumers to keep the societal welfare pool full by buying the more expensive product.   With everyone thinking this way, the societal welfare pool would be drained in no time at all.  And second, the gap between the lower-priced and more expensive good will eventually grow so great that even if people showed an interest in societal welfare over their own consumer welfare,   at some point the cost savings of buying the cheaper good cannot be ignored.  As we all know, sometimes the costs or production at home become so enormous that there's just no point in producing the product anymore.

Free trade is great, but only if everyone plays by the same rules and enjoys the same freedoms.  The time will soon come, if it hasn't come already, when we wake up to find our everyday low prices aren't such a bargain after all.  


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