It cost us more to produce than one pound and we're absorbing the cost so we can offer it at an incredible price as a gift to our customers.In spite of this cost sacrifice, this product can still be seen as a symbol of the ever-popular fast fashion industry. Fast fashion translates the latest trends at affordable prices through increasingly cheap production methods, often heralding reduced cost at the expense of more intangible social costs as well as material and design quality. This post is focusing in particular on the disconnect between the social costs of fast fashion production and the prices they are sold to illustrate the economics term 'negative externalities'
What is an externality?
Externalities are the third party costs from production and consumption of goods and services for which no appropriate compensation is paid. In other words, externalities are the costs which don't have a market price and so are not included in the market costs and pricing models of products. Things like the environmental impact of production are not traded in a market and so do not have a price. This means that even those these costs are very real, they are often disregarded when charging a customer and competing for lower price points. Negative externalities are an example of market failure because the spillover effects of production or consumption are occurring outside market mechanisms.
Externalities can also be positive. For example, when you consume education this provides the private benefit to you of your knowledge and skills (human capital) however this also provides a social benefit if you use this education for the benefit of others. This social benefit is not included in the price of education as this social contribution is something that is once more difficult to quantify with a market price, particularly as the extent of social benefit varies dramatically between individuals.
The case of fast fashion provides an example of a production negative externality market failure. Let's try to illustrate this graphically
The market allocation of quantity sold and the price charged is illustrated by Q1 and P1. Conversely, Q2 and P2 represent the socially efficient equilibrium. As you can see from the graph, the socially efficient price is higher than the market price. This reflects that the market prices we pay for our products are not charging us for externalities, but they aren't paying for them either. This is where market failure occurs. The triangle formed by each dot on this graph represents the deadweight welfare loss or the loss of economic efficiency. This is an inefficient market.
So there you have a brief introduction into externalities as exemplified by the case of fast fashion.