Journal Article

Incentives, Green Preferences, and Private Provision of Impure Public Goods

Sep 1, 2016 | Casey J. Wichman

Summary

When consumers value both the overall level of environmental quality and their own contributions to that end, policymakers can encourage the optimal provision of public goods by incorporating pro-environmental preferences into regulatory design.

Key Findings

  • A general model of private provision of impure public goods is developed to analyze how consumers strategically reveal their preferences for the environment.
  • Pro-environmental preferences can be utilized to induce optimal environmental public goods provision when consumers value both the total level of environmental quality and their own contributions.
  • In the least restrictive case, a regulator can incentivize optimal environmental quality when individual reported provision and total provision of the public good are observable.
  • Applications include enrollment in clean electricity programs and goal setting for energy conservation.

Abstract

Pro-environmental preferences are being used increasingly in environmental policy. In this paper, I consider the role of heterogeneous green preferences for private provision of environmental goods that have both private and public characteristics. Under different assumptions of information available to a regulator, I characterize equilibrium properties of several mechanisms. I find incentive-compatible Nash equilibria that provide socially optimal public goods provision when the regulator can enforce individual consumption contracts, as well as when reported consumption contracts are supplemented with group penalties. Throughout the paper, I ground the exposition with examples of consumer behavior in the context of green electricity programs and goal setting for energy conservation.