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Introducing Markets for Green Products: Product Demand, Environmental Quality and Economic Welfare

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Description

Objectives/Hypothesis:
Markets for green products are forming to replace many pollution-generating products in the economy. Research can accurately predict the potential scale of these markets and, thus, their relationship to pollution reduction. In this research project, we propose a theoretical and empirical study of the introduction of a market for a green product. The project has four objectives: (1) construct a theoretical model that formalizes consumer behavior before and after introduction of a green-product market; (2) test predictions from the model in an empirical application involving the introduction of a market for green electricity; (3) estimate the economic benefits from the green market and assess the potential scale of the market using revealed-preference data; and (4) evaluate markets for green products, and green electricity in particular, as an information-based approach to environmental policy. The model generates three testable hypotheses related to consumer behavior before and after introduction of a green market, and related to the role of consumer preferences for environmental quality as a determinant of behavior. This project will extend existing research on green product consumption by modeling the introduction of a green-product market and characterizing demand before and after market introduction.

Approach:
The project has two general components. First, the research develops and analyzes a consumer-choice model moving from a theoretical baseline of a market for a "conventional" product to a setting in which a market forms for a higher-priced green product. Two types of individuals operate in the model: those with a taste for environmental quality and those without such a taste. Second, hypotheses from the model will be tested in a natural experiment involving introduction of a green-electricity market by an electric utility. From samples of participants and nonparticipants, data will be collected on electricity consumption before and after introduction of the green market and on consumer tastes, socioeconomic characteristics, and housing characteristics. Econometric methods will be applied to test the hypotheses. In addition, data will be collected on reduction in pollution emissions as a basis for estimating the economic benefits from this particular green market.

Expected Results:
Results from this research will make contributions in three areas: application of microeconomic theory, prediction of the potential scale of markets for green products, and assessment of the relationship between green markets and environmental policy. First, the model and empirical application will produce a microeconomic study that joins theory and hypothesis testing on green-product consumption. The study's insights into consumer behavior will inform other researchers interested in environmentally-responsible behavior. Second, the potential scale of green electricity markets, along with other green markets, will be evaluated. This is particularly important with the advent of retail competition in the U.S. electricity industry. These results will educate state policy makers and private decision makers associated with the electricity industry. Finally, the research will contribute to the ongoing assessment of information-based strategies as environmental policy and risk management. Green electricity, in particular, may be an effective complement to the Clean Air Act or future policy on greenhouse gas emissions. New perspectives generated by this research will assist national and international policy makers in developing information-based approaches to environmental policy.
Supplemental Key Words: public policy, pollution prevention, electricity, renewable energy

Metadata

EPA/NSF ID:
R828626
Principal Investigators:
Moore, Michael R.
Kotchen, Matthew J.
Technical Liaison:
Research Organization:
Michigan, University of
Funding Agency/Program:
EPA/ORD/Incentives
Grant Year:
2000
Project Period:
January 2001 to December, 2002
Cost to Funding Agency:
$68,042
Project Status Reports:
For the Year 2001
Objective:
Markets for green products are forming to replace many pollution-generating products in the economy. Research is needed to accurately predict the potential scale of these markets and, thus, their relationship to pollution reduction and environmental policy. In this research project, a theoretical and empirical study is being conducted of the effects of introducing markets for green products. The project has four objectives: (1) construct a theoretical model that formalizes consumer behavior before and after introduction of a green-product market; (2) test predictions from the model in an empirical application involving the introduction of a market for green electricity; (3) estimate the economic benefits from a green market and assess the potential scale of the market using revealed-preference data; and (4) evaluate markets for green products, with a particular emphasis on green electricity, as an information-based approach to environmental policy.

Progress Summary:

A new theoretical model has been developed for understanding consumption of green products. A green product jointly provides a private good and an environmental public good. For example, green electricity provides conventional electrical service and air pollution reductions. The model captures a consumer's complete choice setting in a green market: a conventional private good, a green version of the good, and an opportunity to make direct donations to the environmental public good. Using the model, the potential for green markets to affect environmental quality and social welfare was investigated. In general, there is no guarantee that green markets will improve environmental quality or increase social welfare. Surprising, possibilities exist for an increase in environmental quality that makes some individuals worse off, as well as for a decrease in environmental quality that increases social welfare. Nevertheless, green markets are more likely to improve environmental quality or increase social welfare under three conditions: (1) when environmental quality is a gross complement for private consumption; (2) when fewer individuals make direct donations; and (3) when the number of consumers participating in the market is large.

Work is underway on testing model predictions in an empirical application to Traverse City Light & Power's (TCL&P) green electricity program in Traverse City, Michigan. A mail survey has been conducted of residential customers of TCL&P during summer 2001. Survey procedures followed the Dillman (1978) Total Design Method for mail surveys. The sample included 1,000 residential customers. Of the 1,000 surveys, 675 surveys were returned; 297 surveys were not returned; and 28 surveys were not deliverable. This is a response rate of 69.4 percent, which is an excellent rate for mail surveys. Data were entered in duplicate for quality assurance. We now have a complete and "cleaned" electronic data set based on the mail survey. In addition, we acquired an electronic database from TCL&P on household-level, monthly electricity consumption from 1994-2001. The data sets are being merged to enable cross-section, time-series analysis.

The economic welfare from a green market includes the benefit of providing an environmental public good. For example, by displacing conventional electricity, a green electricity program reduces air pollution emissions. Empirical models are being developed to estimate the economic benefits of voluntary contributions to environmental public goods. Finally, a theoretical model is being developed to consider the relationship between green markets and traditional forms of environmental policy. The interaction between green markets and various policy instruments may have important implications for environmental quality.

Future Activities:
The immediate goal is to address the second objective: to test model predictions using the TCL&P database. In addition, we are continuing work on the third objective, which focuses on empirical estimates of environmental benefits of a green electricity program. Last, under the fourth objective, we will develop a theoretical model that considers the relationship between green markets and environmental policy instruments.

Presentations: Total Count: 3

Kotchen MJ. Green markets and the private provision of environmental public goods. Presented at the Heartland Environmental and Resource Economics Workshop, Ames, IA, September 24, 2001

Kotchen MJ. Green markets and the private provision of public goods. Presented at an Association of Environmental and Resource Economists selected paper session, Allied Social Science Associations Annual Meeting, Atlanta, GA, January 7, 2002.

Moore MR. Welfare from voluntary contributions to public goods. Presented at the Heartland Environmental and Resource Economics Workshop, Ames, IA, September 23, 2001.

Supplemental Keywords: public policy, pollution prevention, electricity, renewable energy.

Project Reports:

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