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Thursday, September 29th, 2022

Markus Herrmann (Département d'Economie, Université Laval, Québec) will present : Amending Pigou: private and social value of environmental consciousness and habit formation.

We examine the introduction of a new product-version with superior environmental characteristics in a market that has been previously served by a competitive industry producing a brown product-type and explore the case where the new product is introduced by a competitive industry. Due to brand-name and advertising, consumers, while unable to distinguish the brown-type producers among themselves, they are able to distinguish the new product from the traditional one. Consumers are environment-conscious, their consciousness being expressed as a reduction in their willingness to pay for any unit of a given product-type according to the total damage generated by the production of that type. At the same time, they show inertia in their consumption-choices, being unable to instantaneously impose drastic modifications in their consumption pattern. Under our assumptions, while the green product has a product-differentiation advantage, habit formation prevents it from instantly gaining its corresponding market share. We set up a continuous-time dynamic-model in order to study how a second-best environmental tax can induce the market to transit to a new equilibrium, in which the green product has gained its long-run market share and compare this tax to the classical Pigouvian tax rate. Our model also comprises a welfare analysis, which allows us to determine the social value of habits taking the market structure as given.