Some Simple Economics of Green Markets

Fabian Herweg, Botond Köszegi and Klaus M. Schmidt
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Fabian Herweg: University of Bayreuth
Botond Köszegi: University of Bonn
Klaus M. Schmidt: LMU Munich

No 572, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Policymakers seek to reduce environmentally harmful production by leveraging consumers' demand for low-externality products. Should the exchange of such products be organized under the standard principle of ``one market for one good", creating a separate market for green goods and integrating regional green markets? We show that this reduces harmful production if and only if green demand is sufficiently strong relative to green supply. Otherwise, a ``demand displacement effect" arises: stronger demand for green goods induces substitution toward brown goods, thereby increasing externalities. This effect interacts with other policy instruments.

Keywords: green markets; socially responsible consumers; externalities; market segmentation; demand displacement; environmental policy (search for similar items in EconPapers)
JEL-codes: D62 D64 Q58 (search for similar items in EconPapers)
Date: 2026-05-11
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