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Article
Eco-Labeling and Market Equilibria with Noisy Certification Tests
Environmental and Resource Economics (2011)
  • Charles F Mason, University of Wyoming
Abstract
An intriguing alternative to traditional methods for regulating externalities is the provision of information about firms’ environmental attributes. An increasingly important example of this approach is “eco-labeling,” where a third party certifies firms’ products. Such schemes are currently used in a variety of countries. This paper investigates the equilibria that may occur with eco-labeling, and the attendant welfare effects. I model certification as a noisy test, subject to both type I and type II errors, but where green firms more likely to pass than brown firms. While it commonly leads to an increase in the fraction of green units in the market, the introduction of an eco-label can either increase or decrease welfare.
Keywords
  • Asymmetric information,
  • Eco-labeling,
  • Environmental economics,
  • Signaling,
  • Testing
Publication Date
2011
Citation Information
Charles F Mason. "Eco-Labeling and Market Equilibria with Noisy Certification Tests" Environmental and Resource Economics Vol. 48 (2011)
Available at: http://works.bepress.com/charles_mason/13/