Billboards cost money to make and don't really seem to significantly benefit anyone other than billboard-makers. A company c putting up billboards presumably increases profits from the resulting increased number of customers, but don't competing businesses' billboards decrease c’s profits by decreasing its number of customers? I don’t see why the total amount of consumption would change, so wouldn't the total amount of business remain roughly constant? So, are billboards economically beneficial or not? Why?
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3$\begingroup$ I think this question might be better tagged as a micro question. Doesn't have a lot to do with macro as far as I can tell. $\endgroup$– JamzyCommented Mar 12, 2015 at 1:00
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$\begingroup$ @Jamzy the microfoundations people would like to have a word with you $\endgroup$– shadowtalkerCommented Mar 12, 2015 at 14:38
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2$\begingroup$ I'd be much happier if you changed the phrase in the title from the incomprehensible "good for the economy" to something with a clear meaning, like "welfare improving". $\endgroup$– Steven LandsburgCommented Mar 12, 2015 at 16:45
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4 Answers
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While advertising can be zero sum, here are two additional dimensions you might want to consider.
Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and are willing to pay higher prices for this more ideal product.
Billboards, in ways not paralleled by other most other forms of advertising, have a negative externality akin to pollution. When the NY Times decides to increase their number of advertisements slightly they bear the costs in customer unhappiness, giving them an incentive to adjust until the private costs and benefits of a marginal ad are equated. But not so with the billboard. The billboard is typically adjacent to public space, so if a nasty billboard ruins the scenery or obscures another billboard the billboard owner doesn't internalize those costs. Since the private benefits of ad revenue continue to accrue to the owner, this leads to too many billboards even if some level of billboard production would be socially desirable.
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1$\begingroup$ Regarding your pollution argument: Shouldn't property prices make up for that? As long as there is a market for the properties that billboards are built on, "Billboard free space" is not a public good like "clean air" is. $\endgroup$– FooBarCommented Mar 12, 2015 at 0:57
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1$\begingroup$ @FooBar, no. A property has significant effects on others, depending on its use. If I build a giant box, or a butterfly garden, those have different externalities. It's why almost all neighborhoods have a rule against obscuring line of sight need the street. $\endgroup$ Commented Mar 12, 2015 at 1:35
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$\begingroup$ @PaulDraper: Making my point for me: You can "buy" neighborhoods and/or set up rules for them. You can't do that with air. There is excludability, hence billboards (or the lack thereof) are not a public good in the traditional sense. $\endgroup$– FooBarCommented Mar 12, 2015 at 2:58
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2$\begingroup$ @FooBar, while you can buy the property, the view is public, and not exclusive. Whether a box, a garden, or a billboard, the view is publicly visible and consumable. $\endgroup$ Commented Mar 12, 2015 at 3:11
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1$\begingroup$ I completely agree in that it is not a private good. I only disagree in that it is a public good with exactly the properties of air pollution. $\endgroup$– FooBarCommented Mar 12, 2015 at 13:08
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It is an interesting question. Let me rephrase it slightly differently and then argue that we don't know.
A Good effect, and a negative externality
What you are saying is that advertisements have a negative externality. To some effect, they increase a firm's sales because customers were not aware at all about the product's existence or features. But to some extent, customers were aware that such products existed, advertisements merely redirected other firms customers to this firm. This second part is the negative externality.
As long as the first effect exists, some advertisement* is welfare optimal. As long as the second effect (the negative externality) exists, the competitive outcome is inefficient: We spend too much on advertisements.
How much to much?
We don't know. Proper scientific evidence includes randomization across some countries that affects the marginal costs of advertisement for their firms. We don't have (and probably never will) have this kind of data.
For partial identification (that is, will a marginal decrease of advertisement yield welfare gains) we need less - but I'm not aware of any study of this kind.
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$\begingroup$ An important thing to note about competition in general is that it is in the short term sub-optimal, since it entails some firms making efforts which don't pay off, and other firms having to make efforts which would not have been necessary if the unsuccessful firms didn't exist, but in the long term competition (in general) can often help shift sub-optimal scenarios toward optimality. $\endgroup$– supercatCommented Mar 12, 2015 at 2:37
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The business stealing effect of advertisements was detailed in
Gene M. Grossman and Carl Shapiro, "Informative Advertising with Differentiated Products", The Review of Economic Studies, Vol. 51, No. 1 (Jan., 1984), pp. 63-81.
Intuitively, since the consumers attracted by advertising will be (in part) stolen from other firms, each firm imposes a negative externality on its rivals and will tend to invest too much in advertising.
This is offset, somewhat, by the fact that advertising improves the match between consumers and products by informing consumers about which products best suit their needs. Thus, contrary to the statement in the question, the level of consumption may well increase because consumers value the products the buy more highly on average.
Grossman and Shapiro build a model in which the business stealing effect always dominates so that the equilibrium level of advertising is excessive.
Some factors not in the Grossman and Shapiro model that are likely to be important, and are detailed elsewhere in the literature:
There is an information overload problem: if everybody sends many advertisements then consumers may be so overwhelmed with ad messages that they become unable to cognitively process them all and simply stop paying attention. This induces an additional externality because if a firm sends an extra message it will crowd the messages of other sellers out of the consumer's attention.
Advertisements can be persuasive: seing an ad can increase a consumer's (perceived) utility from a product. Depending on whether you believe this is a real change in the consumer's preferences or merely psychological trickery, this can either be a good or a bad thing. Depending on the market, both the persuasive and informative roles of advertisements seem to be important see, for example, here.
I agree with BKay that, in the case of billboards, there is likely to be an additional environmental externality.
To the extent that the ad platform (e.g. the billboard owner) has market power, there may be a monopoly distortion of the supply of advertising. In the UK, 80% of outdoor advertising is sold by three firms (JCDecaux, Clear Channel and CBS Outdoor; source: http://www.lgcplus.com/Journals/3/Files/2011/2/3/oft1304.pdf).
answered Mar 12, 2015 at 10:58
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I think BKay's answer is quite good. I do have something to add.
It is worth considering a key benefit to the consumer of billboards (and advertising in general). It can help a consumer search for a product or service advertised. The consumer will only take advantage of this product if it improves their utility. In this way, the knowledge imparted on the consumer by the billboard allows for an increase in utility. In general, an increase in utility is good for the economy. In this case, improving the mechanism of product search allows consumers to find their individual utility maximizing products. The producers also benefit because the best producers get more revenue.
The key assumption here is that a billboard allows a consumer to make a more informed decision.
