Optimal Environmental Policy in Competitive Markets
32 Pages Posted: 11 Jun 2016 Last revised: 22 Feb 2019
Date Written: January 21, 2019
This paper compares the effectiveness of various environmental policies (emission permits, emission taxes, and voluntary emission certifications) in competitive markets. Green product certification (or eco-labels) are shown to be a welfare-improving policy. However, these welfare gains are obtained through “green” consumer surplus as opposed to (social benefiting) emission reductions. Emission taxes and permits are shown to increase welfare by causing “dirtier” or less efficient, firms to leave the market. Although greater environmental conscientiousness makes eco-labeling a more effective tool to improve overall welfare, eco-labels are not as effective at reducing environmental damage relative to emission taxes or permits. Using research on consumer preferences and previously implemented environmental policies, I estimate the effectiveness of market-based environmental policies relative to eco-labeling.
Keywords: Emission taxes, environmental policy, eco-labeling
JEL Classification: D41; D62; L52; L98
Suggested Citation: Suggested Citation