Green products, market structure, and welfare

This paper examines the welfare consequences of private provision of green goods in output markets with product differentiation. In our setting, consumers can be prone to engage in the consumption of green goods (e.g., from eco-labels or due to some forms of altruism), and firm entry is endogenous. Our analysis shows that firms underinvest in environmentally cleaner products in situations where the social damage from polluting emissions is sufficiently large. However, beyond those situations, we find that firms can underinvest or overinvest depending on effects mediated through firm entry because entry raises output and thus increases consumer participation in the market, but it also reduces private incentives to provide consumers with cleaner products.