How Secondary Markets Undermine Social Responsibility

We investigate the effects of secondary markets for durable goods when primary-market production causes negative externalities and secondary-market trade is driven by social responsibility — consumers' concerns about the externalities they cause. Secondary markets may benefit society by allowing responsible consumers to take used goods that would otherwise be discarded, but they also introduce three harmful forces. First, they raise the demand of responsible consumers who perceive used goods as less harmful than new goods, often increasing the production necessary to serve the market. Second, said demand can raise the price of used goods, encouraging purchases of new goods. Third, selling on the secondary market may lower primary purchases by others, making new purchases more acceptable to responsible consumers. These forces imply that if used products have positive private consumption utility, then secondary markets always raise production and lower welfare. If used products may have significantly negative private consumption utility, then secondary markets can raise or lower welfare.