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How behavioural economics is used to reduce externalities of consumption
- Monica Macaes
- 2 days ago
- 3 min read
In the 21st century, the growth of behavioral economics (BE) revolutionized design and transformed markets into theatres, with products acting as actors to appeal to human decision-makers. This international, multi-billion-dollar phenomenon is absorbed into various financial sectors, such as management consulting.
The contemporary global economy is largely driven by consumerism, defined as the growing accumulation of goods and services. Advanced marketing strategies and mass production have strongly connected consumption to social standing and individual identity. Long-term environmental and societal well-being are usually compromised by this unwavering emphasis on instant acquisition. Conventional economic models assume that consumers maximize value by acting rationally and choosing the price that maximizes their value. Nevertheless, the frequency of unsustainable, harmful, or wasteful consumption choices is not sufficiently explained by these models. The goal of behavioral economics is to remedy market failures, which are exacerbated by such restrictions.
Behavioral economics (BE) uses psychology to improve classic economic theory, acknowledging that people often make biased and irrational decisions. Nudge theory shows how small changes in decision settings - like defaulting to paperless billing or automatic retirement savings - can help people choose better without limiting freedom. These nudges work by leveraging biases like the tendency to stick with the status quo.
Externalities, which are costs or advantages incurred by parties not directly participating in the transaction, provide the justification for these interventions. Carbon emissions from gasoline-powered cars, noise pollution from late-night activities, and plastic garbage from single-use items are examples of common negative consumption externalities. In many cases, the consumer's private cost is far less than the larger societal cost, which includes expenses for public cleanup, ecosystem damage, and air pollution. This discrepancy leads to the overconsumption of dangerous products.
While behavioral economics uses psychological concepts to enhance public welfare, marketers and designers have long manipulated the option set to encourage consumption. To promote user involvement and increase perceived accessibility, Apple, for instance, designs its laptops with the screen opening at an enticing angle. This strategy can be modified by governments by creating choice friction, which means making it harder to choose between damaging options. For example, making it harder to choose a reusable bag at the register can deter people from doing things that harm the environment.
Financial incentives can influence behavior alongside psychological nudges. According to behavioral economics, how these incentives are framed is crucial. Behavioral finance emphasizes the importance of loss aversion, in which people experience losses more strongly than comparable gains, while orthodox economics supports Pigouvian taxes to address externalities, such as carbon taxes. Instead of offering subsidies for lower consumption, authorities can present incentives in the form of the possibility of losing a rebate or reward that consumers consider theirs, in the event that their usage exceeds a certain societal norm. This strategy produces a more potent and rapid motivational impact.
Positive externalities, like better public health from vaccinations or civic pride from local farmers’ markets, can also result from consumption. Social proof and gamification help promote these benefits. For example, showing people how their energy use compares to efficient neighbors can encourage conservation. Similarly, giving green badges or public recognition for sustainable purchases motivates people to make choices that benefit society.
Conclusion
To sum up, behavioral economics challenges the notion that all decisions are made rationally, providing crucial tools for public policy. Policymakers can create interventions such as default options, targeted friction, and smart financial incentive structures by acknowledging that decisions are influenced by heuristics, biases, and environmental factors. These metrics help consumers make choices that balance their own interests with more general social and environmental goals. Therefore, behavioral economics offers a practical, economical, and autonomy-preserving strategy for mitigating the adverse effects of consumerism and advancing sustainability.
Reference List
Thaler, H., R., Sunstein & R., C. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press. https://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/0300122232
Alós-Ferrer, Carlos, Kube, Sebastian, Kvaløy, Ola, Strøm & Steinar. (2016). Inertia and the status quo bias in decision making: A behavioral economics perspective. Journal of Economic Behavior & Organization 131, pp. 1-14. https://link.springer.com/article/10.1007/s10282-016-0311-0
(2025). Why a 70 degree angle is the key to selling a MacBook. https://venturebeat.com/business/apple-knows-the-right-angle/
Jr., L. & M., G. (2024). Shaping Preferences with Pigouvian Taxes. N.Y.U. Journal of Legislation and Public Policy 27. https://scholarship.law.tamu.edu/facscholar/2157/
HU, Len-Kuo. Dynamic Economic Fluctuation with Unpredictable Uncertainty—Some Implications from the Theory of Complexity and Chaos. Journal of the Knowledge Economy, p. 1-28, 2025.
Alcott, Diamond & Sweeney. (2011). How Do Electricity Prices Affect Energy Consumption? Evidence from the 2000 California Electricity Crisis. American Economic Review 101. https://www.aeaweb.org/articles?id=10.1257/aer.101.5.1601
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