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The role of information provision as a policy instrument to supplement environmental taxes: Empowering consumers to choose optimally

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  • Eftichios Sartzetakis
  • Anastasios Xepapadeas
  • Emmanuel Petrakis

Abstract

This paper examines, within a dynamic framework, the role of information provision as a policy instrument to supplement environmental taxation. Several products are responsible for long term health problems as well as environmental damages. Many consumers do not possess the required information to optimally substitute away from these products. However, as the stock of information regarding the negative effects of these products builds up, an increasing fraction of consumers behaves optimally. The government uses two policy instruments, environmental taxation and information provision. We show that as the accumulated stock of information increases, the optimal tax rate declines over time. Information provision can shift market demand towards environmentally friendly goods over time, and thus reduce the required level of the tax rate. Our results provide strong evidence in support of information campaigns as a policy instrument to supplement traditional environmental policies.

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Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1012.

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Handle: RePEc:aue:wpaper:1012

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  1. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  2. Heyes, Anthony G. & Maxwell, John W., 2004. "Private vs. public regulation: political economy of the international environment," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 978-996, September.
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  4. Jean-Pierre Dubé & Günter Hitsch & Puneet Manchanda, 2005. "An Empirical Model of Advertising Dynamics," Quantitative Marketing and Economics, Springer, vol. 3(2), pages 107-144, June.
  5. Pim Heijnen & Lambert Schoonbeek, 2008. "Environmental groups in monopolistic markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(4), pages 379-396, April.
  6. Fred M. Feinberg, 2001. "On Continuous-Time Optimal Advertising Under S-Shaped Response," Management Science, INFORMS, vol. 47(11), pages 1476-1487, November.
  7. Arndt, Johan & Simon, Julian L, 1983. "Advertising and Economies of Scale: Critical Comments on the Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 32(2), pages 229-42, December.
  8. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
  9. Emmanuel Petrakis & Eftichios S. Sartzetakis & Anastasios Xepapadeas, 2004. "Environmental Information Provision as a Public Policy Instrument," Working Papers 0414, University of Crete, Department of Economics.
  10. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  11. Liston-Heyes, Catherine, 2001. "Setting the Stakes in Environmental Contests," Journal of Environmental Economics and Management, Elsevier, vol. 41(1), pages 1-12, January.
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  13. Kennedy Peter W. & Laplante Benoit & Maxwell John, 1994. "Pollution Policy: the Role for Publicly Provided Information," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 31-43, January.
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  16. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  17. Eugene Choo & Robert Clark, 2006. "The Effectiveness of Anti-Smoking Campaigns over the Life-Cycle and the Role of Information," Working Papers tecipa-263, University of Toronto, Department of Economics.
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Cited by:
  1. Sengupta, Aditi, 2012. "Investment in cleaner technology and signaling distortions in a market with green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 468-480.
  2. Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
  3. Aditi Sengupta, 2012. "Competitive Investment in Clean Technology and Uninformed Green Consumers," Auburn Economics Working Paper Series auwp2012-08, Department of Economics, Auburn University.
  4. Christopher Jeffords, 2011. "Preference-Directed Regulation When Ethical Environmental Policy Choices Are Formed With Limited Information," Working Papers 01, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.

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