Investments in Environmental Quality Under Limited Attention

Consumers increasingly care about the environmental quality of the goods they consume. However, limited attention impairs consumers’ ability to compare and evaluate the environmental quality of goods. The paper presented in this ZEW Research Seminar shows that investments in environmental quality, consumer surplus, producer surplus, and welfare are non-monotonic functions of attention. Average environmental quality, consumer surplus, producer surplus, and welfare are highest under intermediate (but different) levels of attention. In addition, limited attention influences the effectiveness of policy interventions. The author identifies conditions under which emission taxes, subsidies, information campaigns, and mandatory disclosure lead to less investments in environmental quality, more emissions, lower consumer surplus, or lower welfare.