Environmental Regulation with Preferences for Social Status

Continuously increasing consumption of material goods drives current resource and environmental crises, including climate change and loss of biodiversity. Technology o¤ers solutions, the development and the adoption of which though is not at the speed required to address the crises. Therefore, demand side responses have to be triggered using policies with economists suggesting the use of price signals. Increases in fuel prices during the last decade in both Europe and North America though, have not yielded the expected reductions in the fuel economy. Furthermore, ambitious increases in fuel prices have resulted in considerable opposition, especially by low-income people. The present paper o¤ers an explanation for the reduced e¤ectiveness of environmental taxation by focusing on relatively high-income individuals whose consumption of highly polluting material goods is driven by motivations to improve their social status. Furthermore, the paper shows that complementing the tax with information provision aiming at moderating status seeking overconsumption improves social welfare. Decoupling consumption of highly polluting material goods from social status in individuals?well-being, through information campaigns and/or adver-tisement, could have a substantial environmental e¤ect directly and also indirectly by improving the e¤ectiveness of taxation.