The International Debate and Economic Consequences of Eco-Labeling

ZEF – Discussion Papers on Development Policy No. 18, 1999

Posted: 7 Feb 2019

See all articles by Ulrike Grote

Ulrike Grote

University of Bonn - Center for Development Research (ZEF); Leibniz Universität Hannover - Faculty of Economics and Management

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Date Written: September 1999

Abstract

In this paper we analyze the effectiveness of eco-labels in reducing the supply of eco-unfriendly products. We focus on the situation where a labeled product is viewed by consumers as a private good and develop a theoretical model to pin down theinteraction between consumers' willingness to pay a higher price for a labeled product and producers' incentive to produce them. Based on the model results, we conclude that labeling is an effective device in solving the problem of asymmetric information on the part of consumers and does provide a market-based solution to the problem of eco-unfriendly methods of production. In particular, we focus on the incentive problems that producers face in the event of imperfect and costly monitoring of labels and conclude that (i) absent increased enforcement, there is a tendency for eco-labeling schemes to increase the number of products with false labels; (ii) there is a Kuznet's U-curve relationship between the supply of eco-friendly products and national income in the sense that it pays domestic governments to increase monitoring intensity of labeled products only after income crosses a threshold level and (iii) technology transfer from the developed to the developing countries that enhances the cost effectivenessof eco-friendly producers reduces the incentive for producers to use false labels. There is, however, the danger that labeling programs, especially the ones including production and process standards, will be misused as non-tariff trade barriers towards exports from developing countries. In order to avoid this, governments have to ensure active participation in the development of internationally accepted standards. Furthermore, there must be increased transparency on the existence of eco-labeling programs.

Keywords: Eco-Labeling, Monitoring, Life Cycle Approach, Consumers Taste Bias, World Trade Organization, Government Policy

Suggested Citation

Grote, Ulrike and Basu, Arnab K. and Chau, Nancy H., The International Debate and Economic Consequences of Eco-Labeling (September 1999). ZEF – Discussion Papers on Development Policy No. 18, 1999. Available at SSRN: https://ssrn.com/abstract=3321767

Ulrike Grote (Contact Author)

University of Bonn - Center for Development Research (ZEF) ( email )

Walter-Flex-Str. 3, D-53113
Bonn
Germany

Leibniz Universität Hannover - Faculty of Economics and Management

Koenigsworther Platz 1
Hannover, 30167
Germany

Arnab K. Basu

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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