Signaling the environmental performance of polluting products to green consumers

Abstract

This article studies the role of pricing as a signal of environmental performance for polluting products to green consumers. It is shown that high environmental performance is signaled through a high price when less polluting products are more costly to produce. Consequently, the level of pollution is distorted downward relative to what would prevail under full information.

Investment in cleaner technology and signaling distortions in a market with green consumers

“…As mentioned in Section 1, in the absence of any environmental regulation, Mahenc [14,15] shows that higher price always signals better environmental quality of a monopolist. In my framework, a monopolist behaves in the same manner as long as the emission price is below the critical level i.e., t rt R .…”

“…For any t rt R , D P 40, and the value of D P increases with increase in the level of emission price; whereas, for any t 2 ½t R ,t D Þ, D P o0, and the absolute value of D P decreases with increase in the level of emission price. 13 Mahenc [15] mentions that if it is cheap to produce cleaner products then the clean type would indeed reveal its environmental performance by charging a price lower than that prevailing under full information.…”

“…I assume that if the realized outcome is a clean production technology then the firm always uses that technology. 15 As described in Section 2, there is a unit mass of risk neutral consumers; the aggregate demand for the product of the clean and the dirty types are given by (2) and (1) respectively.…”

“…In a monopoly market that is not subject to any environmental regulation, Mahenc [14,15] shows that better environmental quality is signaled by higher price, if the marginal production cost is relatively higher for the clean type. In this paper, I show that this continues to hold when the industry is subject to environmental regulation, but regulation is ''weak''.…”

Market Inertia and the Introduction of Green Products: Can Strategic Effects Justify the Porter Hypothesis?

“…However, the effectiveness of labels may be limited by the fact that there may be imperfect, in that they do not succeed to fully convince consumers on a product's quality, seeBonroy and Constantatos (2008). Higher prices may also be used to signal environmental friendliness as showed byMahenc (2008). However, this strategy is costly as it involves distorting output.…”