Some Simple Economics of Green Markets

Policymakers seek to reduce environmentally harmful production by leveraging consumers' demand for low-externality products. Should the exchange of such products be organized under the standard principle of ``one market for one good", creating a separate market for green goods and integrating regional green markets? We show that this reduces harmful production if and only if green demand is sufficiently strong relative to green supply. Otherwise, a ``demand displacement effect" arises: stronger demand for green goods induces substitution toward brown goods, thereby increasing externalities. This effect interacts with other policy instruments.