Loading ...The Tradeoffs Between Consumer and Societal Welfare
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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.
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