Do Ecolabels Increase Social Welfare? A Theoretical Study of Certification with Endogenous Quality and Imperfect Information

A model of vertical differentiation is used to examine the relationship between consumers' information about the environmental quality of a product and the environmental quality that the firm chooses to produce. I find that if consumers have no information, it will be optimal for the firm to produce a lower quality than the quality that would maximize social welfare. Furthermore, I find that informing consumers about quality through an ecolabel can increase social welfare by increasing the probability that the firm will choose a more eco-friendly manufacturing process. However, I also find that if the information only reaches a share of the consumers, more information can reduce social welfare. Ensuring that all consumers fully appreciate the meaning of the ecolabel will prevent this from happening.