10. Consumption and welfare

Question 1

What is the Eastern paradox referring to?

Answer 1

To survey data showing that increasing in income boost reported happiness only slightly and only to about the medium income level. Satisfaction from consumption depends on one’s consumption relative to social norms.

Question 2

The social norms that we satisfy through consumption are established in the communities we seek membership in. What are the three ways social motives for consumption can be divided?

Answer 2

• Bandwagon effect - desire to consume because others do
• Snob effect - desire to consume because others don’t
• Veblen effect - consumption to illustrate status or worth

Question 3

Explain the rat race concept?

Answer 3

Competitive consumption where everyone is racing for entry into the next highest social group, and so it becomes harder and harder to get there and for every winner there are many more losers and everyone needs to run harder.

Question 4

What are the two distinguishing features of a rate race?

Answer 4

1) everyone would be better off if the race was cancelled; and
2) given everyone else is racing, each person is better off trying to win.

Question 5

What is a good way to demonstrate the rat race?

Answer 5

Prisoner’s dilemma

Question 6

What are positional goods?

Answer 6

Goods with a fixed or inelastic long-run supply eg uncrowded suburbs with an easy commute, tickets to the superbowl on 50 yard line, Rembrant paintings etc

Question 7

What is positional competition? and what does it often generate?

Answer 7

It is the competition for these goods. This is the zero sum game. Negative consumption externalities which are the costs not borne by the consumer.

Question 8

How does the market react with positional goods that are private vs positional goods that are public?

Answer 8

Private - the prices rises which reduces demand and clears the market
Public - the price mechanism is ineffective - there the rationing takes place through congestion, as seen in traffic jams.

Question 9

Explain how the utility function changes to cater for competitive and non-competitive consumption?

Answer 9

UA = (U(XncA + XcA - XcNA) where XcA - is the non-competitive consumption of ‘A’, plus the XcA - competitive consumtion of ‘A’, less the competitive consumption of others.

Question 10

What is included in the competitive consumption bundle? (3)

Answer 10

1) rat race items
2) positional goods
3) goods with significant negative consumption externalities

Question 11

What is included in the non-competitive consumption bundle? (3)

Answer 11

goods consumed primarily for their

• intrinsic utility
• leisure
• physical activity

Question 12

What are two lessons we can learn from competitive consumption?

Answer 12

1) economic growth that increases the supply of competitive consumption goods need not increase happiness (though it may) - when a person gets ahead, others fall behind
2) under this form of the utility function, increases in the stock of non-competitive goods unambiguously raise social welfare.

Question 13

What is a consumer culture?

Answer 13

One in which the primary means of achieving social status is via a material consumption.

Question 14

What are three economic policies for reducing the spread of consumer culture?

Answer 14

1) consumption taxes - thereby reducing sales
2) mandated European style vacations - lower pay in exchange for more leave
3) regulation of advertising - tax on advertising to reduce consumption.