Ecolabeling, consumers' preferences and taxation

Ecolabeling is a means of reducing the information gap between consumers and producers. We study the implication of ecolabeling a supposedly green good for a consumer's allocation of income between a dirty and the supposedly green good. In the model, the role of the ecolabel is to help product differentiation, to give reliable information and to reduce informational asymmetries. We show that a conscious consumer (someone with a stronger green attitude or quality concerns) demands more ecolabeled goods; price-oriented consumers demand fewer ecolabeled goods; a subsidy (resp. tax) on the price of the ecolabeled (resp. dirty) good leads to a larger consumption of the ecolabeled (resp. dirty) good whereas it may increase or decrease the demand for the dirty (resp. ecolabeled) good, depending on whether the consumer views both goods as gross substitutes or complements. We then use a cross-individual dataset of 22,568 consumers and show that the demand for ecolabeled goods increases strongly with the consciousness of the consumer but decreases for price-oriented consumers. Ecolabel-oriented consumers feel more informed; more conscious consumers prefer a subsidy on green goods and a tax on dirty goods; price-oriented consumers do not care about the green subsidy but would vote against a tax on the dirty goods.