Environmental and Economic Consequences of a Market with Green and Brown Firms
Abstract: In this paper we consider an industry where firms which compete à la Cournot are divided into green and brown firms. Firms are motivated to be green by the willingness of consumers to pay a premium price for green products. However, being green requires some "sacrifice" compared to the business as usual: a production practice more considerate of the environment and/or an attitude towards firms' contribution to the global environmental damage caused by their production activity. We consider three different definitions of being green. In the first case, individual green firms adopt a cleaner but more expensive production technology (Green Tech); in the second case, green firms further to adopting a more expensive and less polluting technology form a cartel and control the price (Green Cartel); finally, green firms also recognize that, as a group, they have an impact on the accumulated pollution (Green Club). Firms can change behavior over time based on the relative performance of the other group. This performance is defined by the value function of a differential game played from this given time on playing either like green or brown firm. We first analyze the conditions under which different equilibrium market compositions can be observed, namely only brown, only green, or a mix of brown and green firms. We then look at the environmental and economic consequences of each of the three possible market composition and compare them for the three different definitions of being green to understand which "type" of green is better and under what conditions.
(with Lucia Sbragia)
