Environmental policy with green consumerism

We analyze environmental policy in a model where some consumers (dubbed green) derive warm glow from buying a good of a higher environmental quality, and where green firms differentiate products on their environmental quality to enjoy market power. For any given pollution level, emission taxes turn out to be less cost-effective than an emission standard because taxation always induces a higher wedge between the environmental qualities of products. By stark contrast, consumers prefer taxes to standards when the warm glow intensity is not too large. Also, the ability of green firms to exert market power makes the tax less attractive to green consumers. When the pollution level is endogenized via majority voting, both neutral and green consumers vote in favor of laxer standards and therefore pollution is higher compared to the case of non-differentiated products. By contrast, the majority chosen tax induces the efficient level of pollution. Green consumerism reduces environmental protection with standards but not with taxes.