Eco-labelling scheme, environmental protection, and protectionism

In this paper a model of international duopoly is developed involving competition in both prices and levels of environmental friendliness, and the implications of government policies are studied. It is shown that,contrary to the conventional wisdom, a regulatory increase in the minimum required level of environmental friendliness of imported goods may harm the home firm and may result in a rise in the volume of imported goods. Whether consumers lose or gain from such a regulatory increase depends on consumption spillover effects. We also show that, under certain conditions, the duopoly's equilibrium choice of levels of environmental friendliness is socially optimal.