Ecolabeling: The Private Provision of a Public Good

Abstract

Engaging in environmentally friendly practices and then informing the public through advertising or on the product packaging is known as ecolabeling. In this paper, we examine how effective this type of competition among firms is as a means of privately providing a public good (environmental protection) even in the absence of private provision by consumers. Our theoretical and experimental analyses indicate that if the firms act as Bertrand competitors, they provide some but not the efficient level of the public good. If firms are Cournot competitors, then our theoretical and experimental analyses indicate that how well the mechanism performs depends on the exact type of the public good and on whether or not the added cost of producing the environmentally friendly version are fixed or variable. In some cases, the efficient level is provided and in the others, some but not the efficient level is provided.

JEL Classification: D62, H41