A Diffusion Model of an Induced Environmental Market: Reconciling WTP to Actual Adoption of Green Energy Tariffs

Abstract:     
This paper develops a 'Diffusion Model of an Induced Environmental Consumer Market' in an attempt to link the willingness to pay literature with the established innovation diffusion literature. This concern arises from an attempt to reconcile the large disparities that have been observed between actual adoption of green energy tariffs and willingness to pay for such tariffs. These disparities have often been attributed to upward response bias and the free rider problem. However, empirical research indicates that other factors have hindered the development of green energy markets, including supply side problems and poor regulation. In sum, by linking willingness to pay to the concept of innovation diffusion and actual observed adoption levels, the model provides a framework with which to conceptualize the various factors (upward response bias, the free rider problem and market imperfections) that can explain differences between actual take-up and willingness to pay. These distinctions should help policymakers make more accurate assessments of the role that green energy markets can play in the funding of new renewable investments over time.

Keywords: Willingness-to-pay, innovation diffusion, green energy, environmental valuation

JEL Classifications: 033, Q51, Q48, L94

Working Paper Series