| Abstract |
This paper examines, within a dynamic framework, the role of information provision
as a policy instrument to supplement environmental taxation. Several products are
responsible for long term health problems as well as environmental damages. Many
consumers do not possess the required information to optimally substitute away from
these products. However, as the stock of information regarding the negative effects of
these products builds up, an increasing fraction of consumers behaves optimally. The
government uses two policy instruments, environmental taxation and information
provision. We show that as the accumulated stock of information increases, the
optimal tax rate declines over time. Information provision can shift market demand
towards environmentally friendly goods over time, and thus reduce the required level
of the tax rate. Our results provide strong evidence in support of information
campaigns as a policy instrument to supplement traditional environmental policies. |
