Sunday, August 14, 2011

Price Rationalization

When you buy something - anything - say an apple, what do you pay for? You pay for the cost incurred in procuring the raw material - seed, fertilizers, pesticides, insecticides. You pay for the services used - water, electricity, transportation, storage. You pay for the human resource at each point of the supply chain right from the wages of the farmer to the salary of the salesman. You pay for the taxes and the profits for each party involved.

Is that all you pay for? Given the inflation and the macro-economy, I wouldn't want to pay for any of these things! But then there are a few things we don't even consider we need to pay. But as the law of Karma goes, one has to pay for everything one has used.

Nothing is free.

Have you considered who pays to neutralize the pollution created by burning the  fuel used in transporting the apple from the field to the retailer? Who pays for the decomposition of the plastic bag that is give "free" along with the apple?

There are umpteen initiatives by the civil society to counter the climatic deterioration - plant trees, car pool, turn-lights-off-for-an-hour. These all are great initiatives and does help. However, to reduce the problem the pricing in the whole value chain needs to be rationalized.

Fortunately or unfortunately, we have started adding value to things based on the price (the converse,  however, should be true). So, if we really want people to stop using the plastic, the best solution, in my opinion, is to 'rationalize' its price. The moment we start adding the 'cost' of decomposition to the costs of the plastic considered currently, its price will go up and will automatically deter people form using it.

Basically, the idea is that people who does the crime pay for it. If someone is using more plastic or more fuel then he should pay for the treatment of the pollution he creates. Currently, everyone pays the price - either in terms of tax which is used in green initiative by the government or in terms of the diseases we gets because of the pollution.

It's analogous to going for an equal-contribution-lunch with a large group to a very expensive place. Each one in the group thinks of ordering the most expensive item as the value he gets by eating it is much less compared to price he pays (given, it is shared by a large number of people). When everyone starts thinking in that way - the overall bill becomes much higher and so does each person's share. However, if we change the system to - pay-for-what-you-eat instead of equal-contribution, then each person will only order things he likes and are within his budget. This reduces the personal bills and hence the overall bill.

But currently, everyone is paying.

Sadly, changes will not happen over-night. There are huge vested interests that believe in ordering the most expensive dish in an equal-contribution system. These influential people will obviously not allow the system to change to pay-for-what-you-eat. Perhaps, I'll explore in a later post the topic of how these 5% of the people make policies which are beneficial to themselves but still impose it on the 95%

As civil society, we should start thinking and discussing the rationalization of the prices in the value chain. There a host on intangibles involved and converting them into dollar/rupee value will be challenging. Convincing the powers that be to incorporate these challenges will be even more difficult. We have seen a glimpse of this brazen futility at Copenhagen in December 2009. However, it's only when we start debating and discussing about price rationalization and more so questioning the price of things that we buy, we'll be overwhelmed by the "irrational" prices. And as a society, we might want to pay in money than by deteriorating our health due to environmental issues.

I guess, i now understand the proverb better - There is nothing called a free lunch.

19 comments:

aativas August 15, 2011 at 12:14 AM  

You have written on a very important topic. Some assume that they are paying no cost, 'Zero Cost' - but someone else is already paying for it. It is time we look at the 'free' things culture and bring in change.

Someone is Special August 15, 2011 at 12:43 AM  

Hi Prashant,

Welcome To Blog-a-Ton! A very important topic, I must say.

Who pays for the decompostion of the plastic bag? Beautiful thought.. I understand & agree to the proverb, "There is nothing called a free lunch." Thought provoking post.. Good luck for Blog-a-Ton. Free... are we?

Someone is Special

Vikram Pyati August 15, 2011 at 3:17 AM  

Very well written and very well explained....Can't agree more with you.

binzy August 15, 2011 at 6:18 AM  

Nice essay on pricing in the value chain. It must need to be rationalised. Mind-stimulating !!

CRD August 15, 2011 at 10:46 AM  

Hi Prashant,
The suggestion you've made cannot be applied universally. For example, using normal fuel would be a less expensive option than using alternative fuels that are more eco-friendly. The cost of processing is much higher in the case of the latter. Look at CNG for example.

Penalising the user for using cheaper eco-deteriorating products might not be possible in cases where livelihoods are at stake. You can't expect poor farmers to spend more in order to substitute harmful pesticides with something more eco-friendly. Pricing here will depend on demand-supply constraints, and price wars will determine who emerges all-trumps.

In such a scenario, governmental regulations is not necessarily a better approach, but is more feasible.

All the best for the COntest :)

Cheers
CRD

Do check out my entry
Them Slaves

The Fool August 15, 2011 at 1:42 PM  

Very relavent topic. A problem economists have been grapling with - The free rider problem. Thats where government role comes in. And more government role means opening the road for more corruption. So we are in a ctach 22situation here. Nicely written. I have been missing the essay genre in Blg-a-ton these days. Good to see one again.

You can find my entry here In search of freedom

Sadiya Merchant August 15, 2011 at 5:03 PM  

neat concept.
tho to b very honest i don think it feasible.
also wat i undrstnd is u wish to mk d system more geometric or slab oriented n my exposure isn very much bt frm d littl i kno, in d long run dat creates far more problems n b4 u hav figured out a way to mk sens of d new system in place, millions hav alredy bn shorted.

i agree individual accountability is important bt hey lets nt forget, v stil liv in india.
nt an xcuse bt rather another issue summed to d ones dat alredy exist :)

D2 August 16, 2011 at 9:51 AM  

I do like the idea. However, as Sadiya also said, the idea is impractical in the current scenario of the world, especially considering the third world nations and the developing countries. All these nations lack the resources to make contingencies.
For example, in most European countries and in the USA, plastic bags have either been replaced by paper bags or the plastic bags are always sent for recycling. India doesn't have the money to spend on such issues at the moment. In fact, no developing and under-developed nation has the money or resources to be utilized in such ventures.
They have too much on their plates.
The idea seems too idealistic in the current scenario of the world.

Aashish Sood August 16, 2011 at 10:03 AM  

First time I have been on your blog and I liked it... I liked the topic that you have discussed and rather liked the idea of pay for what you eat concept... unfortunately, I dont think that this kind of situation would ever be implemented as the sellers would want the demand to increase; regardless of the cost to the environment.

ATB for BAT

Do check out my entry at Free? To do what exactly?

Regards
Wandering Thoughts

Anonymous August 16, 2011 at 2:53 PM  

Very well written and thought provoking . Have gone through all the comments and i was bit surprised to see that most of them think this is infeasible. is it really so? I see big words such as "third world nations", "demand", "supply" and "subsidies" .Though, i don't understand most of them, i would like to be observational and confine to basics.
if VAT(value added tax) could account for the whole supply chain process (tangibles) then i don't see a reason why is it not feasible to account for the intangibles (could be pollution created by plastic too :))
Also,recent shoppers would realize that most of the stores started charging for the carry bags they provide you (Check your bill once again :))
So, i see that things are changing rather slowly but i don't think that factoring in costs for the means is not infeasible. After-all pay for what you get

Anitha August 16, 2011 at 4:05 PM  

"Who pays for the decomposition of the plastic bag that is give "free" along with the apple?"

It might take time to implement this globally. But this can be done easily in private shops.
Few are already doing this.
Recently, I went to Homecentre(lifestyle) for shopping. At the time of billing, that guy asked me extra Rs.7 if I need plastic cover for the things I bought. I got angry for a split second that they are charging money for cover also. But later, I thought it serves me well for not carrying bag. I am impressed.

pri August 16, 2011 at 8:05 PM  

a very idealistic and practical approach to a genuine issue...

if only this kind of realisation dawned on more..sigh!

but like you said, changes wont occur overnight---and public awareness is the first step.
kudos to you!!

all the best for BAT :)

you can read my entry here---
FREE

Prashant Mehta August 16, 2011 at 9:28 PM  

aativas ji
Yep. I agree.

Someone is Special ji
Thanks!

Vikram Pyati ji
Thanks!

CRD ji
This is exactly my point. Right now we "think" that normal fuel is less expensive than the more environment friendly options. My question is - who decides the price of the fuel - demand-supply? Regulations? I am sure you remember September 2008 when the US economy collapsed? The price of a houses reduced drastically. The same house that was expensive has now become cheaper. The point i am trying to make is that prices of things could be changed to reflect the ecosystem at that point in time and this is what i mean by "Price Rationalization".

I want to question - why are chemical pesticide cheaper than organic ones? From a demand perspective, "no one" would want to use chemical pesticide vis-a-vis organic if they were of the same price. So, the price difference is primarily because of the supply end. And this is where "regulatory" agencies come in. They should rationalize the price so that "organic fertilizers" have an equal playing field.


The Fool ji
Agreed. This is a problem with government intervention. But that's a different problem altogether. I think we need to break a problem into smaller ones and address them. I totally agree that there will be leakage of funds because of corruption - but i think that's a compromise we need to make - it's a trade-off between larger environmental hazards and minor (compared to the environmental hazards) fund leakage

Prashant Mehta August 16, 2011 at 9:39 PM  

Sadiya Merchant ji
Yes. Changing a system overnight may create a lot of issues. And we should implement it in phased manner. A small step at a time. Learn from each step and fine-tune the strategy at each level.

I would get more context about what you said if you could elaborate on what problems you are referring to.

D2 ji
I agree. The idea is a little idealistic. We have seen such talks failing at an international level. But we need to take a step forward. With the Internet making the world flat - we need to make an effort to create awareness.

Aashish Sood
Unfortunately. However, i am optimistic. Not because of my inherent nature but because we don't have a way out. What are we going to get if earth, the only planet we have, is no longer livable?

Anonymous ji
Thanks!

Anitha ji
Oh yes. It has started. We have started paying price for the decomposition of plastic. We need to institutionalize the same principle throughout.

pri ji
Thanks!

nidhi August 17, 2011 at 7:47 AM  

very relevant topic..the idea is really great..nice concept :)
FREE

VikramAdith August 17, 2011 at 10:04 AM  

Understanding the impact of our actions (in this case purchases) right from the creation of a product, to its consumption would be a mind boggling exercise in measurement that might just be impossible to execute.

Probably following the 80-20 rule, we could cover most of the important impacts though.

Brijender Singh August 17, 2011 at 1:29 PM  

You make a convincing case for price rationalization, especially through your allusion to the futility of Copenhagen 2009.
In an age with inflated mark-ups plaguing almost every aspect of our lives, this argument gains potency and urgency too.
Yet, one wonders if the very basics of economics as also the interspersed dynamics of pareto-optimality, elasticity and absolute/comparative advantages should be subverted to ease an essentially transient, pecuniary problem.

the critics August 17, 2011 at 7:33 PM  

i cannot agree or disagree with you completely...... pay for what you eat that is right concept - but that's now how it exist in the society right, the so-called human society. when we live as a group it is as a group we take up responsibility for our actions ........

using plastics is wrong i cannot avoid the consequences happening to me simply because i stop avoiding them completely but still if i stop using it then someone-else in the society also share the benefit......thats how it works right.......rationalization of money...maybe it will happen if we go back to stone age when no money existed...maybe those are the better days too.....;.............


very interesting and stimulating...thank you for writing up something stimulating...loved it....

Prashant Mehta August 18, 2011 at 1:56 AM  

nidhi ji
Thanks!

VikramAdith ji
I agree. We cannot execute it end to end. We can start with a few high-impact areas

Brijender Singh ji
Well, i brought in the Copenhagen 2009 summit event not to make a case for price rationalization - but to acknowledge that implementing it will be very difficult. Could you please let me know which transient monitory problem are you referring to? The issue of environment is definitely not transient and not really related to money.

the critics ji
I totally agree about the living as a group part. But when such a thing doesn't work, we need to find alternative. I doubt if anyone would part their income and share it with others unless imposed by law. So, when we don't want to share our wealth (assets), we should also be not sharing our liabilities (pollution we create).

Price Rationalization wants to address that very issue that you mentioned. Currently, a person has no incentive of not using plastic because he thinks that if doesn't use then someone else will. However, with price rationalization they will have to pay the price for using plastic - all by themselves.

Hope i am able to convey my thoughts. Thanks for your feedback!

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