Lemons and climate change
It is easy to be lost in the world of economics. Jargon and indecipherable formulae make the most simple concepts sound incredibly complicated.
The etymology of the word economy traces its roots back to the Greek words “oikos” & “nemein”, respectively translated into the English “household” & “management”. Coming to grasps with the functioning of households would be much easier than exploring international trade and financial systems!
My interest in economics and social sciences emerged in high school as I explored various topics ranging from the functioning of markets to social stratification and inequality. Throughout university, I continued exploring economic theories and concepts, including climate change economics.
I was recently listening to an episode of my favourite podcast, “How To Save a Planet”, on how we fail to talk with each other about climate change. As I was listening, I had a lightbulb moment. What if an economic theory could explain why we refrain from engaging in conversations about climate change?
Born in 1940, George Akerlof is one of the most famous economists. Having studied at Yale and MIT, his academic career led him to teach at Berkeley and the London School of Economics. He is most known for his work on information asymmetry in markets, for which he was awarded the Nobel Memorial Prize in Economic Science in 2001.
I started this article by highlighting the issue of complicated jargon, so what exactly does information asymmetry mean in the context of economic markets and what is the link with lemons?
Information asymmetry implies that all of the participants in a market do not have access to the same amount of information. It is dangerous in the context of economic markets as it may lead to market failure.
Akerlof used the example of a resell market for cars. In these markets, there are good and bad cars, lemons in this context. Sellers of the cars know their quality, but the buyers don’t.
Now say that the sellers are willing to sell the good and bad cars for 10,000 and 5,000 dollars respectively. Unable to distinguish between the two types of cars, buyers would be willing to pay 7,500 dollars, the average price of good and bad cars to avoid overpaying for low-quality vehicles.
However, at that price, sellers of good quality vehicles are not willing to sell for 7,500 dollars, which will drive them out of the market. Ultimately, the consumer will only be left with lemons!
In my opinion, most of the learnings from Akerlof’s theory are transferable to help us understand why all too often, individuals are wary of approaching the topic of climate change with friends or family. Opposing viewpoints can make the subject quite divisive, especially in countries such as the United States with a large portion of the population denying the science of climate change.
Back to Akerlof’s story, it is possible that a small share of “lemons”, climate change deniers, is leading to a breakdown of the “market” for conversations on climate change. If you are unaware of the opinions of your friends and family on the topic, could there be a cost to engaging in these conversations? Would we want to stay close to individuals with views greatly opposed to our own? This uncertainty may prevent individuals from starting conversations.
Climate change is not a fight that is won alone. No single organisation, company, or individual will come up with a planet-saving solution. We need individuals sharing ideas, encouraging climate action, and collaborating on new ideas to drive the reduction of global greenhouse gas emissions.
I would be the first to judge someone who denies the influence of human activity on climate change, or even the simple existence of climate change! But why would we do that? Wouldn’t it be much more important to engage in these tough conversations and understand opposing points of view?
It won’t be news to you that we live in increasingly polarised societies, in part exacerbated by the influence of social media. For US voters approaching the 2020 election, climate change was a more politically polarizing topic than abortion! Not being able to talk to one another about climate change is incredibly dangerous if we are to fight it together.
Perhaps you won’t convince someone to believe in climate change, but if you make them aware of how the increase in environmental disasters will increase their insurance costs or the price of the food they purchase, they might listen to you. There’s no right way to approach a conversation about climate change. It’s all about understanding how you might link the subject to the interests of whoever you are engaging with.
