Expenditure Cascades - Positional Externalities

Positional Externalities

Expenditure cascades employ positional externalities, which may relate differently than other types of externalities. When a new purchase changes the context within which an existing positional good is evaluated, a positional externality occurs. In situations where a good is upgraded and becomes a popular item to own, that good becomes a positional externality. It has changed the context within which that good exists. Positional Externalities also have an effect on an individual’s happiness. When a person focuses on the haves and have-nots of those around him, he realizes the items that he does not own relative to the others in his class system. This realization leads to increased unhappiness about his position in life in terms of items owned.

Robert H. Frank cites an experiment that shows people choose a world in which they own a larger home than everyone else, over having larger homes for everyone yet a smaller home than his neighbors. Frank concludes that people will give up absolute consumption in order to obtain a better relative position. Expenditure cascades are triggered by consumption, especially conspicuous consumption. The consumption by the wealthy triggers increased spending in the class directly below them, and the chain continues down to the bottom of the income ladder. This is a dangerous reaction for those at the bottom who have little disposable income originally, and even less after they attempt to keep up with others' spending habits.

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