Saturday, December 24, 2005

Ban all advertising

I've been thinking about advertising recently. It seems to me that it creates a deadweight loss to society. Resources allocated towards advertising are solely being used to change the spending patterns of the recipients. Any demand created for your product must have an opportunity cost.

Is this of any benefit at all to society? Word-of-mouth seems reasonable: your choices of products may improve, given you trust the source. And for minimal costs. Plus the whole impossibility of regulating it.

What other positive effects exist? Well, especially in the case of new technology, it may increase awareness about a new product that will ultimately save them more money than the net cost of the advertising. Or in the case of Government advertising to raise awareness, it may educate people and cause them to change their habits to the benefit of society.

But in the vast majority of cases, advertising, while perhaps creating a profit for the business, will not be of benefit to society. Here's an oversimplified example:

In a small community living on a completely isolated island somewhere far away, there are two bakers. Nobody does any advertising on this island, and the residents are reasonably well-off.
One day, a person working to provide some useful good learns about the advertising business, and decides to give it a shot. In this example, he earns around about as much money as he did producing his other useful good. One of the bakers, interested in the potential for expanding his business, approaches the advertiser. The advertisements provide a boon to the baker: he increases his profits well beyond the costs of the advertisement. At the same time, the other baker and any other workers providing a good that was foregone in favour of the advertising baker's goods are worse off. Not to be outdone, the whole community begins advertising, each as well as each other. The end result was that no-one managed to sell any more goods or services than previously, though if any did, it still would not be of any net benefit to society. The deadweight loss was of all of the resources put into advertising, which could have be used to produce goods better for society as a whole.

All of this happens on a grander scale. It is especially problematic with political advertising: not only are votes explicitly decided between A & B (and minor parties), causing any campaigning to be overtly wasteful, but the need to raise funds prompts corruption as parties seek to fill the interests of their backers, creating even more waste.

Don't forget your broken window fallacy. Profits of the advertising agency and the business are not wealth creating, remember that. Only if the net benefit of advertising (say, acquiring superior products, which is debatable in itself, advertisements are not renowned for this) is greater than the costs is it any benefit to society. The costs are more than economic too: many have complained about the adverse effects it may have on impressionable young minds. Sure, you can debate how neglible or meaningful this may be, but I highly doubt it can be argued as actually being positive. Furthermore, remembering the shoplifter's fallacy: the final price of a product will include the advertising. A product may be more cost-efficient but all those savings are drowned out on the marketing budget. Also, your appeal to purchasing the product could very well be for a completely irrational reason: not price or quality, but the emotionional impact of the advertisement.

So how do you ensure people aren't ripped off for knowing any better? Perhaps the internet could be especially helpful here. With easy ways to sort prices, we shouldn't have to buy apples for $5 each simply because we don't know any better. In the case of political campaigning, you could perhaps simply be handed a booklet containing policies (force people to you know, think about what they're voting for). Voters will still be biased towards name recognition, but that occurs anyway.

Another, less radical option, or perhaps an introductory option, could be to tax/restrict/ban unsolicited advertising. "Spam" exists outside of the internet: every time you see a billboard that wasn't in exchange for anything, you're being "robbed" in a sense. On television, it's somewhat of a contract: get free viewing in exchange for having to deal with ad breaks. You can choose not to watch it. But when forced upon you, it's a lot worse. Part of an eventual goal to properly cost externalities, it'd be quite relieving, personally.

Rant on.


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10:10 PM  

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