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.
31/07/2004
myEcon Newsletter
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