View source for Too much stuff: the deadweight loss from overconsumption

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[[Category:Deadweight Losses]]
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{{DES | des = Deadweight loss can be due to overconsumption.  "Overconsumption is pervasive. It happens when there are negative externalities, and market participants do not take into account the full social cost of their production and consumption decisions." | show=}}
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{{Quotations|Too much stuff: the deadweight loss from overconsumption|quotes=true}}

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In a simple supply and demand world there are two sources of waste.

Underconsumption is the first. It occurs when taxes, price ceilings, price floors or other interventions prevent the economy from reaching the free market equilibrium. Consumers would like to buy, suppliers would like to sell, but they cannot make a mutually beneficial exchange because there has been interference with the market.

The loss of consumer and producer surplus associated with departures from the competitive market equilibrium is called a deadweight loss. It measures the inefficiency, the loss of well-being, the waste associated with market distortions. The deadweight loss created by underconsumption is described in Wikipedia, and just about every ECON 1000 text ever written. If students know one thing when they finish first year economics, it's that a deadweight loss is that little triangle under the demand curve.

 
 

Yet there is another kind of deadweight loss, the waste associated with over consumption. Take parsley, for example.

I use a sprig of parsley here and a sprig of parsley there to add flavour and nutrition to salads, soups and stews - say two ounces per week. But the local supermarket doesn't sell two ounces of parsley. A consumer's only options are a large bundle, weighing about half a pound, or no parsley at all. The same is true of cilantro and other herbs. True, if parsley is treated like a delicate cut flower, put in a jar of water, and kept in the fridge, it will last a fairly long time, but inevitably half of any bunch of parsley I buy ends up as waste, in the compost heap.

Graphically, the situation is shown in the diagram below. When drawing the diagram, I've assumed that the supply curve, the price charged to the consumer, is equal to the marginal cost of production. That's not a 100% realistic depiction of the parsley market, but it makes life easier.

Given the marginal cost of parsley, the consumer would like to be at the point "just right", where the consumer surplus is maximized. However the consumer is only given a choice betwen "too little" and "too much." At the point "too little", the consumer surplus is zero. At the point "too much", the consumer surplus is equal to the difference between the blue triangle (the gains from consuming up to the point "just right") and the red triangle - the loss from the production of parsley that generates fewer benefits to the consumer than it costs to produce.


Overconsumption is pervasive. It happens when there are negative externalities, and market participants do not take into account the full social cost of their production and consumption decisions. It occurs in insurance markets, where consumers do not pay the full marginal cost of the goods and services that they consume. Firms encourage over-consumption when the market structure allows them to charge a price above their marginal cost - for them, more sales means higher profits. Information failures - as in the health care market, where consumers do not know the true benefits of the services offered - facilitate excess consumption. Over consumption can result from product standards - mandatory airbags, for example - or ensue from consumers' attempts to signal social status, the consumption arms race.

The question is: why does the standard economics undergraduate curriculum focus so much on underconsumption dead weight loss, and so little on the waste associated with overconsumption?
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