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Consumer's Environmental Awareness and the Role of (Green) Entrepreneurship: Lessons from Environmental Quality Competition and R&D Activities for Environmental Policy

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In the recent last years, in particular in the aftermath of the global financial and economic crisis, many countries initiated economic recovery plans with a major focus on stimulating green entrepreneurial activities to revive economic growth. Further, the recovery plans intend to improve a country's awareness for a direct orientation towards (strong) sustainability and green growth. Before discussing strategies towards green growth, in this paper we propose a novel framework to increase our understanding of the interplay of process R&D activities, the strategic price and environmental quality setting of heterogeneous entrepreneurs in a market where consumers feel up to paying for environmental quality improvement of a vertically differentiated good. In the paper we decompose an entrepreneur's incentive conducting process R&D in four parts. In particular we show that an entrepreneur's incentive of conducting own process R&D is reduced due to the existence of knowledge-spillovers. Moreover, due to the strategic complementarities, both in prices as well as in environmental quality, a strategic effect reinforces the negative consequences of the spillover-effect. We show that the externalities in the model require corrections based upon a mixture of fiscal policies and a process R&D subvention scheme establishing a first-best solution. We further thoroughly discuss the implementation of a second-best solution and derive environmental policy implications.

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Bibliographic Info

Paper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 321.

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Length: pages
Date of creation: Jan 2013
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Handle: RePEc:aug:augsbe:0321

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Keywords: Technological change; Process R&D; Green consumerism; Vertical differentiation; Emission tax; Environmental quality; Environmental policy;

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