But This One's Natural!

Trying to determine the eco-fabulous nature of goods on store shelves is not as easy as glancing at product labels. The reason: terms like “green” and “natural” have no reliably instructive meaning. This fact has real consequences for the market and seems to just beg for federal regulation.

Firms use wholesome-sounding phrases and pro-environment assertions to differentiate their products and woo consumers. In turn, consumers are not only willing to switch to greener products, but they also appear prepared to dig deeper into their wallets to buy such goods because they expect an added benefit—like reduced negative externalities—that justifies the added cost. This increased demand and willingness-to-pay presumably translates into gains for innovative firms that can develop truly environmentally-friendly products. However, without a clear way to discern the extent to which products live up to their green claims (if at all), society cannot realize as much (or any) of such anticipated benefits. To put it another way, consumers lack a rubric with which to sort through all the “green noise” in the market, and so they end up opting (and paying) for lesser products without making an informed choice. Innovative firms then watch their potential gains get competed away not by imitation that is equivalent in its benefits, but by imitation that is gray-green at best.

A way to diminish this market-frustrating asymmetric information problem is through the establishment of a national standard that (a) prescribes criteria for determining how “green” a product is—and how that measure is to be displayed on packages—and/or (b) spells out concrete definitions for what can be called “natural” and the like. Consumers would then have a more trusted and meaningful mechanism for evaluating goods, while firms looking to capture a share of this market would have an incentive to pursue R&D in hopes of introducing new products that could earn top-level environmental ratings or the right to use formerly ambiguous terms.

A green* post by Matthew Zawadski with support from Paola Durango.