Public vs. Private Eco-Labeling of Environmental Credence Goods: Maximizing the Gains from International Integration

Abstract

Using a model of vertical product differentiation, we analyze the welfare gains from economic integration when countries harmonize their eco-labeling and certification policies for environmental credence goods. Specifically, we show that harmonized mandatory, exclusive discrete labeling will not maximize the gains from economic integration, i.e., the choice of eco-labeling regime can have a negative effect on market structure if firms choose to exit, reducing the range and quality of goods in the integrated market, and thereby reducing aggregate environmental benefits. In contrast, under a harmonized mandatory, non-exclusive discrete labeling regime, private certification increases the likelihood of maximizing the gains from international economic integration.

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