Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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Planned Obsolescence: a tax with strange effect on economy

The French government is hoping to help consumers – and increase growth – by making it illegal to manufacture products with artificially shortened lifetime. We argue that proving such case will be nearly impossible in modern technology and the ban will act as a tax, with consequences even worse than the status quo. If governments want to artificially boost production, they should in fact subsidise products with shortened lifetime, instead of banning them.

Over the centuries, governments have been coming up with all sorts of plans to boost employment in their domestic economies – the very employment which is reduced by other tax policies and regulation. In the 1930s, to boost growth, US government was encouraged by campaigners to force companies into limiting their products’ lifetime by design, so that more can be produced This February, to boost growth, the French Senate passed a law banning companies from limiting their products’ lifetime by design, so that more can be produced.. What’s going on?

The new law (specifically, an amendment of the Law on Energy Transition) has made it a criminal offense to “limit intentionally the lifetime of a product by design, for economic reasons”, punishable by two years in prison or €300,000 fine. This is the concept of “planned obsolescence” (PO) whose merits (and existence) have been debated for decades.

Can PO exist?

Making products break down prematurely is at first blush a strange business strategy. Under normal circumstances, such producer would be outcompeted by another. The strategy could possibly survive only if at least one of three conditions are met: producers can and do conspire, consumers are dumb, or simply don’t care.

Conspiracy: There is no guarantee that a disappointed customer will go back to the same producer for his replacement product. Introduction of PO would therefore have to be coordinated across the market, i.e. competition would have to break down. And yet, when everyone is producing sub-par products with reduced lifetime, the potential benefits of extra demand would explode for any one “cheater” who would continue to produce standard quality. PO cartels would therefore be difficult to sustain.

Uninformed: Naturally, customers would have to be able recognise the “good old” quality in the non-conspirator. In the past, scattered information about true longevity may have been difficult to collect from dispersed customers. Today, a disappointed customer will share her annoyance on various “review” websites and social networks. Reputation for short-lived products is difficult to shake off.

Irrelevance: Who knows what the optimal materials are to produce a given product? Even if PO is happening, it must involve substantial costs to justify public policy and heavy fines. Who minds when their mobile phone stops working after 4 years? Most people will have replaced it with a better one before then. This improvement offsets much of those costs. (Today you won’t even lose your data.)

Does PO create or destroy jobs?

Creation: In its cradle, PO was praised for its ability to create jobs. In 1932, at the height of the Great Depression, Bernard London published a pamphlet calling on the US government to make PO compulsory for companies so that production is stimulated by replacing the prematurely failed goods. This is, of course, a “broken window fallacy” first expressed by the French(!) economist Bastiat. In the short run it may artificially create jobs, just as breaking windows creates jobs in the glass industry. However, long-run growth is harmed, as too many resources are tied to this essentially unproductive replacement business.

Destruction: Today’s French government, however, believes that PO actually destroys (French) repairing jobs (now that manufacturing has largely moved abroad), so to create them it must ban PO, not encourage it. The EU’s Economic and Social Committee concurs, having called for a total ban on PO in 2013. The opinion’s co-rapporteur even uttered the paradoxical sentence “If we threw away less, we would have to repair more, creating thousands of jobs closer to home.” What an odd thing to say. If the government wants more jobs in repairing, it should actually even subsidise PO so that more stuff gets prematurely broken and replaced. Where else are these “thousands of jobs” going to come from if companies produce more lasting products?

Repairability has nothing to do with PO

The fallacy of extra jobs comes from a belief that as part of PO, companies design products intentionally unrepairable. Ban on PO is believed to force companies into the “good old days” when people actually repaired consumer durables. And this, it is believed, will bring back jobs. However, such analysis is based on reversing the actual causality, and not appreciating what has been happening to costs over recent decades.

Today, TV sets are no longer repaired not because they are manufactured intentionally unrepairable, but because the cost of the labour necessary to repair them has become too high relative to the cost of a new (and better) piece. When this happens, it then sometimes makes sense for manufacturers to make things difficult to repair, if closed prefabricated units make the whole unit cheaper (and/or dust proof, for example). . Put differently, t things are unrepairable because when repairs are due, consumers prefer to buy a new, technologically more advanced TV set..

Ban on PO is a tax

It is difficult to see how wanton acts of PO could actually be proved before the court, especially with modern technology; but even the mere possibility of being sued increases the risk of doing business for manufacturers. This translates to various increased costs and therefore acts as a tax on business.

• They will have to hire extra legal services, both in the design stage as well as later for actual court cases.
• Businesses do insure themselves, but the costs of this insurance will also go up.
• The increased uncertainty will also make it more difficult for the business to raise money as risk premium is added to the interest rate.
• The €300,000 cap on fine for violation favours big businesses, but the two years in jail will mean that all companies will now have to increase wages of those who could be theoretically jailed.

Consequences of the PO tax

• Increased prices. Part of the tax is likely to be passed onto the consumer in the form of increased prices.
• Less innovation. The higher costs of credit (see above) will stifle innovation.
• Poorer people worse off. The archetypical image of PO is “using cheap components”, e.g. plastic instead of metal. However, cheap versions of a given product make it affordable to the less well-off. In poor African countries, for example, the recent telecommunications revolution would have been difficult if everything had to be “built to last” and expensive.
• PO may in fact be a “natural correction” to a “excessive durability bias” in the economy. As economists Fishman, Gandal and Shy showed in 1993, economies of scale encourage too much “sticking to old products” and discourage innovation.

The biggest danger of any ban on PO would be if courts start interpreting a mere release of a better version as way of “limiting the lifetime” of the previous, still fully functional one. Apple, for instance, was sued in 2013 in Brazil for introducing the fourth generation iPad “too soon” after the third. Do we want to live in a world where things are banned from getting better?

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