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On the Interaction of Eco-Labeling and Trade
While environmental certification can provide useful information to consumers, there is concern that it indirectly erects trade barriers. I construct a two-country model where some firms use an environmentally-unfriendly (brown) production technology in each country, while other firms use environmentally-friendly (green) techniques. There are two green techniques, one in each country. Obtaining the eco-label entails certification costs; green firms in the exporting country must bear an additional cost to obtain the eco-label. I discuss the impact of eco-labeling on the quantities of green goods produced in each country and resultant welfare impacts, and the impact of changes in labeling costs.
