Article ID Journal Published Year Pages File Type
10483321 Resource and Energy Economics 2014 21 Pages PDF
Abstract
Environmentally-friendly (“green”) products face a unique set of market barriers. I develop a dynamic model of observational learning and costly search wherein a green consumer product enters a market to challenge an established “dirty” product. Purchase decisions depend on price and quality differences, consumers' willingness-to-pay to protect the environment, and the cost of obtaining information. Using both theoretical analyses and simulations, I solve for the long-term market performance of the green product. Conditions are provided for when it is socially optimal to encourage green purchases with public policy. Comparative statics predict the effectiveness of various policy tools used to improve market performance. Permanent financial incentives are shown to be more effective than informational campaigns at encouraging green purchases if the green product is inferior to the dirty substitute. Temporary financial incentives are shown to be an ineffective tool to encourage the long-term market success of any green product. Numerical market simulations are used to test and supplement the theory.
Related Topics
Physical Sciences and Engineering Energy Energy (General)
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