Economic Basics Applied to the Market of “Green” Goods and Services.

1. Supply and Demand of “Green” Products and Services

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much goods or services are supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Problematic

In our case study (the market of “green” goods and services - referred to here as MGGS), we have to deal with important distinctive features:

• As for the supply, be it goods or services, we are dealing here with a very young (about 10 years) and volatile (unstable) market.
• There is no effective standard to define the type or quality of products or services offered.
• Research in the “green” sector is still in its infancy. As a consequence, there is not really such a thing as “green” products or services that could be used as reference.
• At such an early stage, it was too premature to establish any kind of price control on the particular sector of “green” products and services. In addition, the pricing process is done through an extremely wide scale (too expensive being the rule rather than the exception due to the absence of a referential benchmark), mostly empirical and depending on individual appreciation and ability to sell.

• As for the demand, given the lack of a defined, structured and clearly identified offer (our MGGS), the customers are not liable to modify their behavior. They have to deal with a triple communication issue. They are at the same time:
• Too informed (massive pressure by the media and advertisement to “go green”, green and sustainable being popular)
• Badly informed (there is a good deal of non-accurate and even often false truths, scientific or not, circulating because of the early stage status of the research in the sector)
• Not informed sufficiently (There is a new scientific application, company, service or organization emerging almost daily and consumers find it difficult keeping informed of the situation. Consumers also have no indication as to how to organize the data received and to make an informed decision of what is reliable, usable or what information should be discarded)

2. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a product, the less people will demand that product or good. Therefore, the higher the price, the lower the quantity demanded. The amount of goods that consumers purchase at a higher price is less because as the price of goods increase, so does the opportunity cost of buying that product. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of a familiar product they value more. Herein lays the major difficulty and the double-bind that curbs the MGGS: The quantity of “green” products and services exchanged is not large enough to make prices decrease. At the same time, the offer on “green” products and services is neither structured nor “visible” enough for the customers to increase their demand on such products significantly.

2003 Investopedia.comUsed only with express written permission

Chart showing that the curve is a downward slope.

Therefore, all the factors remaining equal, we can postulate that a better structured and more visible offer will make more customers purchase additional “green” products and services therefore lowering their price, which will in return increase the quantity exchanged on the MGGS.

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantities of “green” products and services demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of “green” products and services, the lower the quantity demanded (A), and the lower their price, the more “green” product and services will be in demand (C).

However, the movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the “green” products and services changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

2003 Investopedia.comUsed only with express written permission

Chart showing movement along the demand curve.

Therefore the point becomes to actually create that change by “assisting” the consumers modify their demand of “green” goods and services.

3. Supply and Demand Relationship

Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affects the price of “green” products and services.

Imagine that a special edition of a “green” mattress is released for $200. Because the mattress company's previous analysis showed that consumers will not demand mattresses at a price higher than $200, only fifty “green” mattresses were produced because the opportunity cost is too high for suppliers to produce more.

If, however, the fifty “green” mattresses are demanded by 70 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more “green” mattresses to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.

That is the current situation of the market of “green” goods and services. It becomes all the more complicated when the mattress company discovers the difficulties in reaching a large number of customers because “green” mattresses is a marginal product and there is no specific way for a large number of consumers to know that a particular type of mattress is now available, unless they are actually in search of one specifically (typically through internet research). As a result, the basic consumer will buy a standard mattress. This is where the market of “green” products and services stands at present.

If, however, there are 70 “green” mattresses produced and demand is still at 50, the price will not be pushed up because the supply more than accommodates demand. In fact after the 50 consumers have been satisfied with their “green” mattress purchases, the price of the leftover mattresses may drop as the producers attempt to sell the remaining twenty “green” mattresses. The lower price will then make the “green” mattresses more available to people who had previously decided that the opportunity cost of buying the “green” mattresses at $200 was too high. That’s where we want to get. To make the quantity of green products and services exchanged increase in the lowering prices process. But this process has no chance of happening as long as a larger number of consumers are not reached.

2003 Investopedia.com Used only with express written permission

Chart showing equilibrium point.

Consequently, there should be a place, a tool or a way for the consumers to obtain the information available and organized as to how to source the “green” products or services they are looking for at the best price possible; what’s at stake here is for the market of “green” products and services to become more visible.

4. Equilibrium

When supply and demand are equal (i.e. when the supply function and demand function intersect), the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, businesses, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are receiving all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

Nevertheless, by working on the demand and on the supply, the goal here is to make the market of green products and services more efficient and closer to equilibrium than it is today (only a small quantity of goods and services exchanged and prices too high).

THE GAEA21 GREEN INDEX: An Attempt to Make the Market of “Green” Goods and Services More Visible

1. Case Study: Green Mattresses

Before starting this case study, it’s important to note that there are no clear figures as to establish which percentage of the population actually buys “green” products (studies show a clear discrepancy between what potential customers say they would do when interviewed and the purchases they actually make). If we return to our example of a “green” mattress, what happens?

From the customer (Demand) point of view, if he/she is interested in buying a “green” mattress, how does the consumer proceed?

• If the consumer researches the purchase of “green” mattresses he/she will find out that there are more than 11,500 possible results! (And we deliberately chose an example of a “green” product that is atypical so as to narrow the research scope).
• Now he/she has to go through all the results to determine which kind of mattress corresponds to his/her needs in regards to the material used, the comfort, “green” due diligence on the company that produces the mattress and its suppliers; if they have a social conscience; if they treat their employees well, etc. It’s at the very least difficult and he/she will have to devote a considerable amount of time to the task without even being sure his/her study will be accurate.
• If the consumer decides to use price as a criteria, he/she will soon discover that there are nearly as many prices as there are types of “green” mattresses, plus the price scale can be 1 to 500 without clear explanation as to why every mattress company’s product is “greener” than those of the competition.
• Therefore, the consumer will make a very frustrating and totally empirical choice (based on his own appreciation or on the advice he will receive in the nearby mattress supplier where he/she will in any case be advised that this particular supplier’s “green” mattress is the best in the world) or more likely, he/she will end up buying a product he already knows, probably cheaper and that is familiar or already tested. Quite possibly a non “green” option (too complicated and no reliable choices available).

From the mattress producer/seller company (Supply) point of view, how to make its product available to a large number of consumers and actually sell it?

• If a company has made its own “green” due diligence plus offers a product that is “green” and stands out in regards to the competition given the material or process of fabrication used, how to prove its product is superior to the others given the fact that every mattress company will use the exact same points to prove themselves “greener”. How to overcome the competition and dispose of imitation and non-satisfactory “green” mattresses on the market?
• Where to advertise or promote the specified item to actually sell the product, given the fact that the producer is working on a very specific market with difficulty to use standard marketing tools to target a given population effectively (the people that buy green products are not necessarily a given socio-professional category and don’t have a specific geographic location) enough to sell sufficient quantity?

2. The “Gaea21 Green Index”: An Attempt for Building Up a More Efficient Market of “Green” Products and Services

The rationale for the Gaea21 Green Index (GGI)

For this index to work and be effective in regards to making the Market of “Green” Goods and Services (MGGS) become more efficient, there is a need for an organization that would collate the data and information worldwide (nest, collect, analyze, test and structure) as the greater the market, the more efficient it will be. An independent and neutral non-profit organization in the sustainable development sector that would work closely with universities and chambers of commerce and trade internationally seems the logical solution. Government funding, chambers of commerce/trade and the private sector would be required. Gaea21 appears to be a superior solution.

The development of the gaea21 green index would start with companies that offer “green” products and services in a given area and then would expand in the proximity, growing with time and developing according to the principles developed above. The second logical phase would include the assessment and evaluation of all existing companies via a “green audit” of their standards and procedures based on enhanced versions of the ISO 14000 and 14001 (which is all but a reference framework but doesn’t guarantee – far from it – that a given company is “green” or has an effective social responsible conduct).

What would the Gaea21 Green Index be made of?

High standard quality of products and services

• The purpose of this directory would be to provide the clarity and structure lacking in the market of “green” goods and services.
• It would identify and list all the suppliers and produce involved in the MGGS alphabetically, by category and by type of product or service.
• It would specify their names, addresses, type (foundation, NGO, company, individual) of products or services, and also:
• The capacity in which their products or services are in line with sustainable development
• The degree of satisfaction of consumers/users with a rating and comments (internet blog?)
• The degree to which gaea21 attests their sustainability after due diligence
It would observe new products and services in the green and sustainable development field (actually every new company or research being completed should be addressed to the gaea21 green index) and would test them and publish results online.
• It would be in a position of establishing a benchmark (an average, “acceptable” price for every green good or service exchange) by comparing price/product and price/quality and by estimating a middle price. This would have as for effect to regulate the MGGS and lower the price, hence augmenting the quantity of goods and services exchanged. It would therefore benefit the consumers (Demand) and the suppliers (Offer) by making the MGGS more efficient.
• Rating and evaluation levels could be:
N1 = external actor
• N1 = external actor (no preliminary evaluation but polls, surveys andquestionnaires to their customers in order to establish their reputation and classification),
N2 = member of the green network gaea21
• N2 = member of the green network gaea21 (n1 + green due diligence);
N3 = member of gaea21
• N3 = member of gaea21 (n 2 + signatory of the gaea21 charter in accordance with which they commit to the following 3 principles: 1) A fair price (market); 2) High standard quality of products and services; 3) Ethics (social and environmental, within their structure and with their suppliers and consumers).
gaea21 charter in accordance with which they commit to the following 3 principles: 1) A fair price (market); 2) High standard quality of products and services
• N3 = member of gaea21 (n 2 + signatory of the gaea21 charter in accordance with which they commit to the following 3 principles: 1) A fair price (market); 2) High standard quality of products and services; 3) Ethics (social and environmental, within their structure and with their suppliers and consumers).
Ethics (social and environmental, within their structure and with their suppliers and consumers).
• N4 = holder of the label gaea21 (the labeling process will intervene 3 to 4 years after the index is created and when a significant number of the companies that compose it have become members of the gaea21 and are hence evaluated and rated through gaea21 charter).
• Its geographical scope would be in as many countries as possible, starting with Switzerland, Canada, France, The USA and Australia. The point is to create a gaea21 cell in each of these countries. Each cell will be liable to conduct poll, surveys rating and research as to apply a due diligence and gaea21 charter.
gaea21
• Its geographical scope would be in as many countries as possible, starting with Switzerland, Canada, France, The USA and Australia. The point is to create a gaea21 cell in each of these countries. Each cell will be liable to conduct poll, surveys rating and research as to apply a due diligence and gaea21 charter.

3. The Establishment of the “Gaea21 Green Index”:

The gaea21 service would also include a green business network and provide any given selection at the request of providers or distributors for services or products respectful of the requirements of sustainable development.

A logical first step would be to gather as many already existing “green” stakeholders and networks as possible (research, companies, services…) to be able to give the most complete overview. It would be then necessary to have them detail their criteria and qualifications and complete a template that would reflect most of their ethical, social and/or environmental status.

Eventually, green stakeholders will also be classified and rated on the basis of a control on their sustainability performance, conducted by their peers using the tools proposed by gaea21 and/or under its auspices. This control would result, when appropriate, to the labeling of the actors involved.

This labeling, independent, transparent and objective in its method (based on due diligence plus polls and surveys over consumers and peers), would enable both customers (Demand) and green stakeholders (Supply) to directly identify the products, companies, organizations or individuals who meet the requirements of sustainability, are environmental, social, ethical and permit economic viability.

Yvan Claude is president of gaea21, a non-profit.