Abstract
We study in this paper the effect of the type of information provided by an ecolabel. For this purpose, in the framework of a model of vertical differentiation, we compare the effects of a partial information label (Type I) and a complete information label (Type III) on firms’ profits, industry profit, consumers’ surplus, environmental damage and social welfare. A partial information label indicates that the environmental quality of a good exceeds some given threshold. The authority issuing a partial information label chooses its labeling criteria while maximizing the social welfare. A complete information label indicates the exact environmental quality chosen by firms. We prove that while a partial information label always improves the social welfare and deteriorates the green firm profit compared to a complete information label, the comparison between the two types of ecolabel in terms of the brown firm’s profit, the industry’s profit, the consumers surplus and the environment depends in a non-obvious way on the marginal cost of quality and on the environmental sensitivity to quality.
Highlights
The ecological quality of a product is a credence attribute difficult or impossible to be identified by a simple consumer
We prove that the social welfare is always higher with a partial information label and that the profit of the green firm is always higher with a complete information label
When comparing the equilibrium qualities chosen by firms in both cases, we prove that a partial information label is more stringent than the high quality certified by the complete information label authority for low marginal costs and high environmental sensitivity to quality
Summary
The ecological quality of a product is a credence attribute difficult or impossible to be identified by a simple consumer. The objective of this paper is to compare the impact of type I (partial information) and type III (complete information) ecolabels on social welfare, consumers, firms and the environment. Fischer & Lyon (2019) and Li & Van’t Veld (2015) use different models The former authors consider a finite number of firms divided into two types based on their unit-costs of reducing the environmental damage of their product and a continuum of consumers characterized by their intensity of preference for the label’s stringency (defined as the minimum effort of a firm to reduce its environmental damage). Li & Van’t Veld (2015) consider a finite number of firms differing by their unit-costs and a finite number of consumers differing by their preference for the environmental quality of a good Both papers consider labeling authorities managed by different sponsors (NGO, Industry, Government...).
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