Environmental Quality Provision and Eco-Labelling

This paper is a literature survey of some relevant issues arising from environmental quality provision and eco-labelling schemes. First of all it is shown how the two topics are strictly related. Firms adopting a production process (or producing a good) more environmentally friendly than others (environmental quality provision aspect) may want to make it public (eco-labelling aspect). The survey addresses the question of optimal environmental quality provision (also as a policy tool) and firms compliance. With regard to eco-labelling, its impacts on market structure are analysed. It hasn’t been possible to consider all issues, like for example that of moral hazard in providing non truthful information. Different issues related to trade are also analysed, even if the literature is not abundant on this yet. In the literature both aspects, of environmental quality provision and eco-labelling, are analysed using product differentiation models. The usual result is that multiple equilibria arise depending also on the parameters. Models are also not robust to different assumptions. Environmental quality provision and eco-labelling are also compared to more traditional policy instruments like taxes (or subsidies) and standards. From the empirical evidence it can be concluded that information plays a crucial role both for consumers’ and producers’ decisions. Consumers are willing to pay a higher price to be informed about the greenness of a good, and a label can really be a determinant in their choice of which brand to purchase. On the supply side, disclosing information about the environmental performance of a firm can affect investment decisions and its stock value.