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Green Premium, Ecolabel, and Environmental Damage

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  • Aditi Sengupta

Abstract

In markets where differences in environmental performance of competing firms arise due to differences in technology and other attributes that cannot be altered in the short run and firms have private information about these attributes, an ecolabel may allow firms to credibly communicate their private information to environmentally conscious uninformed consumers. This may ameliorate the distortion in pricing and consumption patterns in the market outcomes, when there is no credible direct disclosure mechanism and pricing is the only channel of signaling private information. In an incomplete information duopoly market with price competition, I show that even if a credible ecolabel is available freely, clean firms may not always find it individually advantageous to adopt the ecolabel. The adoption of the ecolabel by the clean firms removes price and welfare distortions (caused by price signaling); in this case, the availability of the ecolabel makes competition more intense, reduces market power, increases market shares of the clean firms, and lowers the expected environmental damage. The effect of the ecolabel on the incentives to invest in the development of a clean technology is more complex; the presence of an ecolabel may reduce the level of aggregate investment.

Suggested Citation

  • Aditi Sengupta, 2016. "Green Premium, Ecolabel, and Environmental Damage," Auburn Economics Working Paper Series auwp2016-16, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2016-16
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    File URL: http://cla.auburn.edu/econwp/Archives/2016/2016-16.pdf
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    References listed on IDEAS

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    3. Teisl, Mario F. & Roe, Brian & Hicks, Robert L., 2002. "Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling," Journal of Environmental Economics and Management, Elsevier, vol. 43(3), pages 339-359, May.
    4. Ramon Casadesus-Masanell & Michael Crooke & Forest Reinhardt & Vishal Vasishth, 2009. "Households' Willingness to Pay for "Green" Goods: Evidence from Patagonia's Introduction of Organic Cotton Sportswear," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(1), pages 203-233, March.
    5. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
    6. Kuhn, Michael, 1999. "Green Lemons - Environmental Labels and Entry into an Environmentally Differentiated Market under Asymmetric Information," Thuenen-Series of Applied Economic Theory 20, University of Rostock, Institute of Economics.
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    8. Li, Yuanhao & van 't Veld, Klaas, 2015. "Green, greener, greenest: Eco-label gradation and competition," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 164-176.
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    More about this item

    Keywords

    Financial Stress Index; Duopoly; Ecolabel; Green premium; Incomplete information; Investment; Mandatory disclosure; Signaling;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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