Can Eco-Labeling Do More Harm Than Good? A Comparative Statics Analysis

This paper uses a two-product partial equilibrium model with demand- and supply-side substitution effects to identify supply and demand conditions under which eco-labeling would be most and least effective. The results suggest that eco-labeling is most effective at reducing environmentally harmful production when it leads to a decrease in demand for unlabeled products and producers respond to non-price incentives in adopting the certified methods. The analysis demonstrates that consumer willingness-to-pay a premium and the potential demand for an eco-labeled product do not provide the best indication of an eco-labeling program’s effectiveness at reducing adverse environmental impacts