A 'Characteristics' Approach to Content Regulation and Consumer Choice
Government policy and the choice of goods
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- 4.1 Prohibited Consumption Technology
- Government Subsidy
- Consumer Education
Government policy and the choice of goods.One of the major advantages of the approach to consumer choice advocated by Lancaster (1991) is that it provides insight into the impact on consumers of changes in the characteristics of goods and services attributable to changes in government policy. Government policy has the potential to impact upon consumer choice in a number of ways. Three policy scenarios will be considered in this section.. The first scenario will examine the situation where a government policy prohibits certain consumption technology. That is, the policy prohibits certain combinations of characteristics and hence certain goods from being sold. Policy scenario two will examine the impact of a government policy which provides a subsidy for goods using a specified consumption technology. That is, those goods which produce a certain combination of characteristics will receive a subsidy from the government. The third scenario to be considered is a government 'consumer education' campaign. 4.1 Prohibited Consumption Technology Let us consider a goods group, where the goods produce two characteristics C1 and C2 as defined by the consumption technology for those goods. Consumers are able to purchase combinations of goods as discussed in section 3. Let us represent the consumers situation by Figure 2, where the consumer can choose from four goods, and given the prices of the goods faces the efficiency frontier ABCD.[3] Initially, the consumer in Figure 2 is maximizing his/her utility by consuming a combination of goods G3 and G4 represented by point X1 . This combination of goods produces characteristics in the ratio C21:C11. The government then introduces a policy that prohibits goods being produced where the ratio of the C2:C1 is less than C22:C12. This means that any goods to the (right) of G3, such as G4 , are now prohibited. [4] 
For the consumer represented in Figure 2, the original consumption choice is no longer possible since good G4 is prohibited and can not be combined with G3 since this will produce characteristics in a combination which do not meet the government requirements. The consumer now faces a corner solution to their consumption choice. That is, since the arc CD is no longer feasible, the consumer maximizes their utility by consuming only good G3 , at the point C. However this is on indifference curve IC2, which represents a lower level of utility to the consumer. The effect of the government policy on this consumer has therefore been a reduction in their level of utility. Government Subsidy Instead of prohibiting a certain combination of characteristics, let us now suppose that the government wishes to subsidize a good or goods which produce characteristics in a ratio deemed desirable by the government. Figure 3 has the same basic form as Figure 2. The consumer is currently maximizing their utility by consuming at point X1 on their efficiency frontier. The government now decides to introduce a policy that provides a price subsidy for goods that produce characteristics in a minimum ratio of C22:C12. In Figure 3, both goods G3 and G4 qualify for the subsidy. The effect of the price subsidy is to increase the maximum amounts of these goods which the consumer can purchase with the given budget. The efficiency frontier for the consumer thus shifts outwards and is now represented by ABEF. 
The utility maximizing consumer now shifts from consuming at point X1 on indifference curve IC1, to consuming at point X2 on indifference curve IC2. The consumer is now receiving a higher level of utility. The effect of the government subsidy for this consumer has therefore been a rise in their utility level. However, one should note that not all consumers would be made better off by a subsidy which only lowers the price of certain goods. For instance, returning to Figure 3, a consumer with indifference curve IC3 and consuming at point X3 will not be made better off by the subsidy since the shift in the efficiency frontier has not occurred in the segment of the frontier relevant to that consumers utility maximizing choice. A policy of subsidizing goods which produce characteristics in a desired ratio will therefore increase the utility of those consumers for whom the relevant section of their efficiency frontier is shifted outwards. However for those consumers for whom the relevant portion of their efficiency frontier is not shifted outwards, the subsidy will not raise the utility of these consumers. The exception to this would be in a situation where there were positive spillovers. That is, where there were positive externalities in consumption of the subsidized good. Consumer Education One of the most interesting areas of the characteristics approach as explained by Lancaster (1991), is the concept of consumption efficiency. Lancaster argues that just as the production choice of firms may be inefficient due to "ignorance [5] and lack of managerial skill" , the consumption choice of households may be inefficient as the "consumer may not be aware that a certain good possesses certain characteristics or that certain goods may be used in a particular combination to give a specified bundle of characteristics." (Lancaster, 1991) Advertising and consumer education impact upon the consumer's choice by altering the consumer's knowledge about the prices or characteristics of goods. Firms may go to lengths to ensure that no desirable characteristics of their product go unnoticed, but may be less enthusiastic about providing information of some other characteristics (Lancaster, 1991) Extending our analysis then, the 'cost' of a good to a consumer is made up of the explicit 'price' of the good, plus any information costs associated with obtaining information about the characteristics of the good. Referring to Figure 4. 
With zero information costs, the cost of the goods to the consumer is same as the explicit price. The consumer is able to consume on their true efficiency frontier ABCD in Figure 4. However where obtaining information about characteristics of goods is not costless, then the consumer will be restricted to a lower frontier and will be consuming at a point inside their true efficiency frontier. If the cost of obtaining information about each characteristic is the same, then the effect on the efficiency frontier of including information costs will be a uniform shift inwards of the frontier, such as EFGH in Figure 4. Due to the information costs, consumers now maximize at X1, which is a point on the frontier EFGH. Now consider the effect of a government 'consumer education' campaign that lowers the information costs associated with both characteristics. The result is to shift the consumers frontier outwards from EFGH, to the frontier represented by the dashed line. As a result of this consumer education, the consumer shifts their consumption from X1 to the point X2, associated with indifference curve IC2 and a higher level of utility. The consumer has thus benefited from the education and awareness policy. Now consider the impact of an education campaign targeted at characteristic C1 only. That is, only the cost of obtaining information about characteristic C1 is reduced. Goods that produce a larger quantity of C1 will therefore have their implicit price lowered by a greater amount than for those which contain lower quantities of C1. From Figure 5 it can seen then that the impact of this policy is to shift the dashed frontier outward in a biased manner. 
One of the interesting implications of biased consumer education [7] is that some consumers may benefit more than others. For example, referring to Figure 5 again, it can be seen that the consumer originally represented by X1 is able to increase their utility by a greater amount as a result of the consumer education policy than the consumer represented by the original point X3. [8] Consumer awareness and education therefore effect the consumer choice by shifting the consumption point closer to the true efficiency frontier ceteris paribus. However if the policy lowers the information costs in a non-uniform manner, then some consumer may benefit more from the policy than others. Download 164.44 Kb. Share with your friends:
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