Skip to main content Accessibility help

Environmental policy in a linear city model of product differentiation

  • Ana Espínola-Arredondo (a1) and Huan Zhao (a2)


This paper analyzes how a tax/subsidy policy affects consumers' behavior when choosing between green (pollution-free goods) and conventional products, and its effects on welfare when a proportion of consumers have strong preferences for green goods. We analyze a Hotelling's linear city model where final products by two firms are symmetric in all dimensions except for the externality their production process generates. Our efficiency comparisons suggest that, under a setting of horizontal product differentiation, an environmental regulation (either on polluting firms or consumers buying their products) yields higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.



Hide All
Bansal, S. and Gangopadhyay, S. (2003), ‘Tax/subsidy policies in the presence of environmentally aware consumers’, Journal of Environmental Economics and Management 45(2): 333355.
Conrad, K. (2005), ‘Price competition and product differentiation when consumers care for the environment’, Environmental & Resource Economics 31(1): 119.
Cook, R., Morgan, D.J., Radenovic, H., Renzi, S., and Born, B. (2007), ‘Seattle Food System Enhancement Project’, University of Washington, Program on the Environment Certificate in Environmental Management Keystone Project, 2006–2007, Department of Neighborhoods, Seattle.
Cornes, R. and Sandler, T. (1996), The Theory of Externalities, Public Goods and Club Goods, 2nd ednNew York: Cambridge University Press.
Cremer, H. and Thisse, J. (1999), ‘On the taxation of polluting products in a differentiated industry’, European Economic Review 43(3): 575594.
Eriksson, C. (2004), ‘Can green consumerism replace environmental regulation? A differentiated products example’, Resource and Energy Economics 26(3): 281293.
Kotchen, M. (2006), ‘Green markets and private provision of public goods’, Journal of Political Economy 114(4): 816834.
Martin, A. (2009), How green is my orange?’, New York Times, 22 January, pp. B1.
Moraga-Gonzalez, J.L. and Padro-Fumero, N. (2002), ‘Environmental policy in a green market’, Environmental & Resource Economics 22(3): 419447.
Parry, I., Williams, R., and Goulder, L. (1999), ‘When can carbon abatement policies increase welfare? The fundamental role of distorted factor markets’, Journal of Environmental Economics and Management 37(1): 5284.
Rodriguez-Ibeas, R. (2007), ‘Environmental product differentiation and environmental awareness’, Environmental & Resource Economics 36(2): 237254.
Sartzetakis, E., Xepapadeas, A., and Petrakis, E. (2009), ‘The role of information provision as a policy instrument to supplement environmental taxes: empowering consumers to choose optimally’, Working Paper No. 2009.46, Fondazione Eni Enrico Mattei, Milan.
Weitzman, M. (1974), ‘Prices vs. quantities’, Review of Economic Studies 41(4): 477491.


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed