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. Although technology offers solutions, their development and adoption is not at the speed required to address these crises. Therefore, demand side responses have to be triggered using policies, with economists suggesting mainly the use of price signals. However, both the effectiveness and the political acceptability of taxation have been questioned, especially since increases in fuel prices during the last decade in both Europe and North America have not yielded the expected reductions in the fuel economy and after the vigorous opposition to the ambitious increases in fuel taxes, for example in France. The present paper offers an explanation for the reduced effectiveness 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 informative advertisement campaigns, could have a substantial environmental effect directly and also indirectly by improving the effectiveness of taxation.