This paper studies the welfare implications of different institutions certifying environmental quality supplied by a monopoly. The monopolist can voluntarily certify the quality of the product through an eco-label provided either by an NGO or a for-profit private certifier (PC). The NGO and the PC may use advertisement to promote the label. We compare the NGO and PC regimes with the regime where the regulator imposes a minimum quality standard. The presence of a private certifier in the market decreases the scope for public intervention. The availability of green advertisement reinforces the above result.
This paper focus's on the third-party certifiers' strategy when choosing a required label quality, and the consequent market outcome. We consider two different objectives of the certifier: maximizing global demand for the labeled product (wide public policy), or maximizing global quality of the market (global quality policy). In a duopoly set up with firms bearing different costs with respect to quality provision, firms always opt for differentiation strategies: only one adopts the label. However, the labeling firm is not necessarily the most efficient one. In the case of a wide public policy, the efficient firm will produce labeled products only if costs of labeling are sufficiently low. In the case of a global quality policy, the low cost firm will always push the highcost firm into the labeling program.
We develop a vertical differentiation model for the setting of standards and labeling in an international economy with two countries, North (N) and South (S) under two regimes: Autarky and International Trade. We assume that a firm in country S has a comparative advantage in producing low quality goods while a firm in country N has comparative advantage in producing high quality goods. Under Autarky each country sets a specific standard and the domestic firm behaves as a monopolist. Under International Trade both countries agree on harmonized standards and firms compete in the unified market. We show that standards harmonization is welfare enhancing compared to the Autarky scenario and that the introduction of a national label in country N does not lead to a Pareto improvement in country S. Consumers in both countries will be worse off with the introduction of the label, for low levels of firm S's comparative advantage.
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