31/07/2004

Environmental Information Provision as a Public Policy Instrument

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The present paper examines the use of information provision financed by the revenues of existing environmental taxation in the case of products that generate damages to the consumers of these products as well as an environmental externality. We show that when information provision is used alone it is welfare dominated by taxation, except if information can be provided costesly. The zero cost case, although not realistic, indicates the potential of information provision and leads us to examine the combined use of the two policies. We find that a policy regime that combines information provision and taxation dominates taxation in terms of welfare. This is because a uniform taxation levies a heavier than the optimal burden on the informed consumers and allows the uninformed consumer to partially free ride on the informed consumers voluntary actions. The combination of policies regime reduces this problem, allocating the effort of reducing the consumption of the environmentally damaging good more efficiently among consumers. Therefore, recycling of environmental tax revenues to finance information provision improves welfare.
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