Seventh Generation and Product Formulation
a. Many consumers are not willing to pay more for environmentally safe products be- cause of the free-rider problem. Individuals pay the full cost of the more expensive environmentally safe product but receive only a fraction of the benefits. Government laws dictating product content supposedly control the externality of products pollut- ing the environment. If some people want even lower levels of pollution, they can pay for this by buying more expensive products. They "consume" the safer product's environment benefits by knowing they are using environmentally friendly products. But they are not able to capture all the benefits.
b. Whether Mr. Hollander is behaving ethically depends on the definition of ethics employed. In Adam Smith's view, the legal pursuit of profits drive resources to their most efficient use. Hence, given that perspective, Seventh Generation is behaving ethically. If on the other hand, Seventh Generation developed a reputation for complete product purity and is not informing its customers of the shift, then it is deceiving them. (Note: We do not believe that there is a single right answer to this question, rather; we find this question useful to motivate an open discussion of the range of opinions on these issues.)
c. You would like to know what the marginal costs and marginal benefits of this decision are. That should depend on factors like:
• increase in quantity sold from the reduction in price (elasticity);
• reduction in demand from changing inputs, holding prices fixed (the shift in demand);
• reduction in demand for other of the firm's products because of this change in policy;
• cost reduction from substitution of inputs; and
• potential cost reduction from similar substitutions in the firm's other products.