HONEST TEA’S IMPACT ON THE
 BEVERAGE INDUSTRY

HONEST TEA’S founders believe the firm’s responsible business practices help to correct some of the negative externalities in the production process. More recently, Seth Goldman proposed that Honest Tea’s industry presence may provide positive externalities shaping the wider market for organic produce. Goldman states that when “When we buy
Honest

Tea 2.5 million pounds of organic ingredients, as we did in 2007, we help create demand for a more sustainable system of agriculture.” Further, Goldman claims that the increased demand facilitated by Honest Tea can create a market for organic
produce “that multiplies far beyond its own purchases.”

Claims like Goldman’s have captured the interest of some economists. Do firms that purchase large quantities of organic produce help to decrease of the price of such produce in the wider market? While evidence supporting an affirmative response is sparse, some economists believe that firms can lower prices of the inputs for their products through two avenues - establishing price stability and encouraging technological progress.

Economists conceptualize this effect in terms of calculating cost. Given that the market for a product is unstable, producers are subject to an additional cost of providing a product on the market. Increased demand from companies like WholeFoods and Honest Tea has two effects. First, it increases both the price and quantity of the product supplied in the market. But economists suggest that the increased quantity can have an additional effect on the probability that produce will be sold, in effect stabilizing the market. This decreases the costs of providing the product, which shifts the supply curve outwards, leading to a decrease in price and an increase in supply. In the short term, the increased price of purchasing green inputs is passed onto the consumer, who is willing to pay a premium to sponsor the use of green technology. The second effect can be an increase in the quantity supplied in the market and a decrease in the price, helping green products to become more competitive in the wider market for produce.

Large-scale purchase of green products may also spur technological progress. Gary L. Nakarado from the U.S. National Renewable Energy Laboratory believes that a thriving market for green technology or produce can also accelerate the pace of technological innovation. “The principle of the learning curve,” Nakarado writes, “is that reductions in cost accompany increased production, and a doubling of the cumulative production of a product will bring with it a reduction in unit cost by a fixed percentage.” A growing, predictable market for sustainable agriculture can encourage producers to enter the market, each of whom compete to implement the most cost-effective production techniques and drive production costs down. The consumer
group Commodities Now believes that the increased demand “‘attracts suppliers to the field and ultimately leads to the development of newer and better products and services.” It can also “benefit both the environment and “companies’ bottom lines.” 3
Nevertheless, start-up costs for emerging brands that cater to consumers that demand green and ethical
products are formidable. Richard Norgaard, Professor of Energy and Resources at the University of California at Berkeley, contends that companies like Honest Tea have to expend significant marketing costs “to inform Connie Consumer about their product and convince her to switch - and stay switched.” 4 Goldman and Nale-
buff have been remarkably successful in doing so.