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Environmental and Resource Economics

, Volume 48, Issue 4, pp 537–560 | Cite as

Eco-Labeling and Market Equilibria with Noisy Certification Tests

  • Charles F. MasonEmail author
Article

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 

JEL Classification

Q5 D8 L15 

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Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  1. 1.Department of Economics & FinanceUniversity of WyomingLaramieUSA

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