Informative advertising by an environmental group
Consuming a product does not (necessarily) reveal the environmental damage of the good. In terms of environmental damage, most goods are credence goods. Therefore, through advertising and pricing the firm will not be able to transmit this information to the consumers. I examine the scope for an environmental group (EG) to signal this information to consumers via advertising and campaigning. Both the short-run (where environmental damage is given but unknown to the consumers) and the long-run (where environmental damage is chosen by the firm, but not observed by the consumers) are considered. In the short-run, Pareto-improving advertising is impossible and social welfare improving advertising is only possible if the difference between a clean product and a dirty product is sufficiently large. However, in the long-run, the presence of an EG seems to have a positive effect on social welfare. This is achieved solely by the threat of the EG to advertise if environmental damage is too high.
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