When is Environmentalism Good for the Environment?

Abstract

We study how the supply of environmentalism, which is defined by psychic benefits (costs) associated with the purchase of high-environmental (low-environmental) qualities, affects the way firms choose their prices and products and the ensuing consequences for the global level of pollution. Contrary to general belief, a high supply of environmentalism does not necessarily give rise to a better environmental outcome because it endows the green firms with more market power which they use to charge higher prices. Nonetheless, environmentalism can be used to effectively complement more traditional policy instruments such as a minimum environmental standard.