Is it Too Easy Being Green? A Behavioral Economics Approach to Determining Whether to Regulate Environmental Marketing Claims

Abstract

Employing principles derived from rational choice theory and behavioral economics, this article advocates the promulgation of administrative rules to govern the environmental claims sellers make about their products. The article asserts that the FTC’s current regulatory scheme, a case-by-case approach that draws upon a set of industry guidelines (called the Green Guides), is essentially impotent when considered in light of the frequency with which products in today’s market bear false or misleading environmental claims. The article is especially timely, because the FTC is currently engaged in its own evaluation of the Green Guides’ effectiveness. While traditional rational choice theorists may argue that market competition alone may drive products with false or misleading claims from the market, bounds on consumers’ rationality and self interest keep them from being able to make optimal purchase decisions, and as a result, market competition itself is unable to weed out bogus environmental claims. The regulation of environmental claims, while arguably paternalistic, is desirable, because in addition to ultimately helping the environment, the benefits it would provide to boundedly rational consumers exceed the costs such regulation may impose on informed or rational consumers, even when discounting the boundedly rational consumers’ benefit by any loss the group would sustain from the moral or cognitive hazard of not being able to learn for themselves which products bear false or misleading claims.

Keywords: Theory And Behavioral Economics, FTC, Administrative Rules, Environmental Claims, Green Guides

JEL Classification: K20, K23