Academic journal article International Advances in Economic Research

Information Disclosure Policies: When Do They Bring Environmental Improvements?

Academic journal article International Advances in Economic Research

Information Disclosure Policies: When Do They Bring Environmental Improvements?

Article excerpt

Abstract There has been a growing interest among policy makers on the use of information disclosure policies for pollution control. This paper theoretically assesses the consequences of information disclosure policies and identifies the conditions under which such policies are likely to bring environmental improvements. Based on a dynamic game framework, the paper shows that both eco-labeling and more general full information disclosure policies may not always result in pollution reduction. Full information disclosure policies are likely to be effective if the product is not heavily polluting and if the minimum quality standard is set quite low. The paper also identifies the conditions under which all consumers are strictly better off with information disclosure policies.

Keywords information disclosure * voluntary approaches * eco-label * pollution * asymmetric information

JEL Q50 * D80

Introduction

Increasing numbers of national and regional surveys show that consumers are willing to pay a premium for environmentally friendly products (Cairncross, 1992; Cason & Gangadharan, 2002; Kirchhoff, 2000; Wasik, 1996). In the presence of environmentally aware consumers, firms have incentives to produce environmentally friendly products in order to differentiate their products from otherwise similar products and command a price premium (Arora & Gangopadhyay, 1995). However, the environmental attribute of the product is known to only producers and consumers cannot typically evaluate the environmental claims even in repeated use. Because of this information asymmetry, firms have found it very difficult to credibly communicate their environmental performances. Thus, for green consumerism to be effective, government has an important role in providing consumers with credible information on the pollution profile of the products they potentially purchase (Pearce, Markandya, & Barbier, 1989).

In response to increasing green consumerism, a number of government-sponsored policies have been implemented which alleviate asymmetric information through disclosure of credible information about environmental quality of the product or pollution profile of firms. Among such policies, a famous example would be eco-labeling; a label is awarded if the products satisfy certification thresholds. Other policies include hazard information disclosures which inform consumers of the environmental hazards that could be caused by particular products (e.g., US EPA's Automobile Pollution Rankings), green electricity pricing in which customers pay a premium for electricity produced from renewable sources (Lamarre, 1997), and various government-sponsored voluntary programs in which participants (or products) are publicly recognized. These policies are not limited to OECD countries. For example, Indonesia's Program for Pollution Control, Evaluation and Rating (PROPER) publicly discloses environmental performance of domestic factories in a five-rating scheme.

Because of widespread popularity, information disclosure policies are called "the third wave of environmental policies" after direct regulations and market-based instruments (Tietenberg & Wheeler, 2001). Governments envision that information disclosure works as a cost-effective policy tool to complement or substitute existing regulatory tools. With information disclosure policies, firms can credibly communicate the environmental quality of their products and may have incentives to voluntarily employ environmentally preferred production methods beyond legal requirement in order to attract environmentally conscious consumers.

There are concerns, however, about their effectiveness in mitigating environmental externalities. Critics argue that information disclosure policies in general may not ensure adequate environmental protection since polluters will not be forced to make abatement efforts beyond minimum legal requirements with information disclosure itself (Gibson, 1999). …

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