AbstractThis paper studies how information disclosed by voluntary environmental labels creates incentives for firms to invest in environmentally-friendly production technologies. I develop a model with differentiated products and imperfectly-informed consumers. Consumers care about the environmental characteristics of goods (for example, how they were produced), but cannot directly observe these product characteristics. Firms differ in their abilities to develop "clean" technologies, but have no incentive to do so absent government regulation or a policy that provides information to consumers. A scheme of voluntary labels, awarded to firms that achieve some chosen level of environmental friendliness, gives some firms enough incentive to develop clean technologies, while others choose to produce "dirty" goods. Each consumer is individually ineffective in reducing aggregate environmental damage but consumers purchase products according to how they privately value environmental quality. I parameterize the relationship between the environmental quality consumers experience privately from their own consumption of a product and the intensity of its environmental damage. I use the model to explain how voluntary labels improve consumer welfare and characterize the welfare maximizing labeling standard. I also contrast the effects of a labeling program on consumer welfare with those of compulsory environmental regulation.
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Bibliographic InfoPaper provided by York University, Department of Economics in its series Working Papers with number 2009_3.
Length: 39 pages
Date of creation: Dec 2009
Date of revision:
credence goods; disclosure; environmental policy; firm heterogeneity and product labeling.;
Find related papers by JEL classification:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2010-02-20 (Agricultural Economics)
- NEP-ALL-2010-02-20 (All new papers)
- NEP-ENE-2010-02-20 (Energy Economics)
- NEP-ENV-2010-02-20 (Environmental Economics)
- NEP-MKT-2010-02-20 (Marketing)
- NEP-RES-2010-02-20 (Resource Economics)
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