Tuesday, May 3, 2011

Conspicuous Conservation: The Prius Effect and Willingness to Pay for Environmental Bona Fides

“The wish to become proper objects of this respect, to deserve and obtain this credit and rank among our equals, may be the strongest of all our desires.” - Adam Smith

1 Introduction
Veblen explained in 1899 that “in order to gain and hold the esteem of man it is not sufficient merely to possess wealth or power. The wealth or power must be put in evidence, for esteem is awarded only on evidence.” Since then, a considerable economics literature has explored the concept of conspicuous consumption and its implications in various settings, with particular focus on purchases that signal prestige, luxury and exclusivity. While consumption of luxurious automobiles, jewelry and apparel surely still afford desired social status in the 21st Century, evolving social norms suggest esteem can be attained through the demonstration of certain kinds of austerity–specifically austerity that minimizes the environmental impact of consumption. In fact, amid heightened concern about environmental damage and global climate change, costly private contributions to environmental protection increasingly confer status once afforded only through ostentatious displays of wastefulness. Consumers may, therefore, undertake costly actions in order to signal their type as environmentally friendly or “green.” The status conferred upon demonstration of environmental friendliness is sufficiently prized that homeowners are known to install solar panels on the shaded sides of houses so that their costly investments are visible from the street. [The authors] call this behavior “conspicuous conservation.”

Home solar panel installation and car ownership decisions are two of the most visible consumption decisions households make. Since the introduction of the Toyota Prius in the U.S. in 2001, a growing number of vehicle models have been introduced with features that reduce environmental impacts, particularly greenhouse gas emissions. They include small and light cars with conventional engines (like the SmartCar), alternative fuel cars (like the Chevrolet flex-fuel fleet), and hybrid cars (like the Prius, the Honda Civic Hybrid, and others). Until the reintroduction of the Honda Insight in 2010, the Prius was the only model that at once provided the standard features consumers are accustomed to in modern vehicle design (climate control, four doors, luggage space, etc.), environmental amenities, and a design unique to the model.2

Today Prius is the clear leader among 24 different hybrid models available in the U.S. In fact, 48% of the 290,271 hybrid cars sold in the U.S. in 2009 were Priuses. The success of the Prius can certainly be attributed to an aggressive and innovative marketing effort by Toyota and to the equity in the Toyota brand. However, national marketing effort does not explain why ownership increases in green communities disproportionately relative to other hybrid cars, conditional on the green attributes of the models. It does not explain why, for instance, Toyota Camry Hybrid ownership does not increase proportional to the Prius after conditioning on green attributes. Likewise, the Civic Hybrid achieves a green rating that is nearly identical to the Prius from a number of sources, ... yet the Civic is underrepresented in green locales.

The unique design of the Prius is not accidental. Toyota executives instructed their designers to develop something unique, regardless of the quality of the styling. ...

Using preferred specifications [the authors] estimate that the mean willingness to pay in Colorado (where the mean Democratic party share is 0.303) for the Prius Halo is between $1,402.84 and $4,208.53. In Washington, where the Democratic party share is 0.53, [they] estimate the mean willingness to pay is between $430.45 and $1,291.34.... In Boulder, Colorado, where the Democratic party share is 0.55, the WTP is estimated to be between $1,875.80 and $7,186.67.

Using market-level data on vehicle ownership in Colorado and Washington, we have empirically identified a significant conspicuous conservation effect related to Toyota Prius demand. Such effects have been the subject of theory and discussion, but to our knowledge have not heretofore been tested empirically. [The] results suggest that, depending on their location, consumers are willing to pay up to several thousand dollars to signal their environmental bona fides through their car choices. Competitive altriusm, i.e. the social signaling motive, may, therefore, provide a strong impetus toward private provision of public environmental goods via purchase of impure public goods in the green market.

by Steven E. Sexton and Alison L. Sexton
April 21, 2011
via/hat tip www.Env-Econ.net

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