The effect of Environmental Quality Misperception on Investments and Regulation

In this paper we analyse a setup where consumers are heterogeneous in the perception of environmental quality. The equilibrium is verified in a setting with horizontal and vertical (green) differentiation. Profits are increasing in the mis- perception of quality, while the investment in green quality decreases the more the goods are substitutes. We further consider the introduction of either an emis- sion tax or an environmental standard. Both interventions rise the investment in quality, but their effect is differently influenced by the level of environmental misperception. We show that an optimal environmental standard may be effective against greenwashing when the marginal damage of emissions is low.