Who pays the price? - True pricing in fashion retail

who actually pays the price gap? (hidden costs)

• not the brand, buyer.

• the gap is paid by those directly affected:

  • cotton farmers: pesticide exposure, low prices

  • garment workers: sub-living wages, unsafe buildings, unpaid overtime

  • downstream communities: polluted rivers, contaminated soils, respiratory illness

  • future generations: climate change, biodiversity loss

What is MPC, MPB, MEC, MSC

• MPC (marginal private cost): the direct cost tot he producer to make one additional unit (e.g., ingredients, labor). This represents the traditional supply(S) curve.

• MPB (marginal private benefit): the direct benefit to the consumer from buying one additional unit. This represents the traditional demand (D) curve.

• MEC (marginal external cost): the hidden damage caused to society/environment by producing one additional unit (e.g., pollution, health, degradation)

• MSC (marginal social cost): the true cost to society. Calculated as:

  • MSC = MPC + MEC

What are the policy toolboxes? Pigouvian taxes.

core idea: policy interventions are essential to internalize hidden costs and correct market failures, tho each tool involves specific trade-offs

• Pigouvian taxes: make the price reflect the cost

  • mechanism: tax each unit of the externality at the level of the damage it causes

  • strength: cost-effective, lets the market decide where to cut

  • limit: regressive, politically hard, damage must be measurable.

What are the policy toolboxes? Standards and bans

• Standards and bans: prohibit the harm, regardless of price

  • mechanism: set a legal limit on emissions, chemical use, or working conditions. If limit is not met, the activity is simply not allowed, the activity is not allowed.

  • strength: “certainty” of outcome, easy to communicate

  • limit: same rule for very different actors, slow to update

What are the policy toolboxes? Extended producer responsibility

• Extended producer responsibility: make the producer pay for the afterlife → producer liability

  • mechanism: brands pay a fee per garment sold, scaled to recyclability. The fee funds collection, sorting, and reuse infrastructure

  • strength: internalises end-of-life cost, rewards better design

  • limit: fees often too low to change behaviour, requires infrastructure

what happens when market equilibrium takes externalities into account?

• we want to be where MSC=MPB

• where Q drops and P increases

• this is the “true price”. It is higher and lowers production to a safer, sustainable level

what happens in this graph?

• delta consumer surplus

• the gov imposes a (Pigouvian) tax = tot he MEC (cost of the pollution it causes)

• this tax increases the factory’s production costs.

• as a result, the private supply curve shifts upward from MPC to MPC+tax

• which lies perfectly on top of the MSC curve.

tax shifts supply up to meet social cost.

what happens in this graph?

• delta private producer surplus

• the gov gives a subsidy = to the external benefit

• shifts the demand curve upward from MPB to MPB+subsidy

• aligns with MSB

• Social curve (MSB) is on the Demand side and sits Above/Right of private demand. We want more production.

what happens in this graph?

• delta externality cost

• no tax or subsidy.

• if property rights are clearly defined and transaction costs are 0,

• private parties can negotiate with each other to solve externalities on their own.

what happens in this graph?

• delta social producer surplus (accounts for social cost)

• tragedy of the commons

what happens in this graph?

• delta social welfare

• shows how society determines the economically optimal amount of pollution reduction (abatement)

• cost of abatement vs. cost of env damage

what is the deadweight loss (DWL)?

• the welfare difference between the private competitive equilibrium and social optimum is a net welfare loss called the DWL

• the DWL is a burden to society that occurs because the competitive market equates price with private marginal costs instead with social marginal costs

what leads to deadweight loss (burden to society from ignoring social marginal costs)

• failure to account for external costs leads to production above the social optimum