Introducing Markets for Green Products: Product Demand, Environmental Quality & Economic WelfareEPA Grant Number: R828626
Title: Introducing Markets for Green Products: Product Demand, Environmental Quality & Economic Welfare
Investigators: Moore, Michael R. , Kotchen, Matthew J.
Institution: University of Michigan
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2001 through December 1, 2002 (Extended to June 30, 2003)
Project Amount: $68,042
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
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.
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.
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.