Green Markets and Private Provision of Public Goods

This paper develops a general model of private provision of a public good that includes the option to consume an impure public good. I use the model to investigate positive and normative consequences of "green markets." Green markets give consumers a new choice: instead of simply consuming a private good and making a donation to an environmental public good, consumers can purchase an impure public good that produces characteristics of both activities jointly. Many governments, nongovernmental organizations, and industries promote green markets as a decentralized mechanism of environmental policy. Nevertheless, I show that under quite reasonable assumptions, green markets can have detrimental effects on both environmental quality and social welfare. I then derive conditions that are sufficient to rule out such unintended consequences. The analysis applies equally to non-environmental choice settings where the joint products of an impure public good are also available separately. Such choice settings are increasingly prevalent in the economy, with impure public goods ranging from socially-responsible investments to commercial activities associated with charitable fund-raising.