The Heterogeneous Effects of Eco-labels on Internalities and Externalities

The Energy Star program labels energy efficient goods and has been credited with reducing the external costs of energy consumption. Its social value is nonetheless ambiguous if, in its absence, consumers both over-value and under-value the energy consumption attribute of goods, relative to their economic preferences. The label must perform opposite tasks to guarantee an increase in consumer welfare: it must prompt some individuals to increase their valuation of the energy consumption attribute and others, to decrease it. Otherwise, the program could yield "negative dividends" by inducing losses in individual-level welfare that outweigh externality reductions. We develop a method to quantify the impact of the program on individual-level decision-making behavior and welfare. Using novel data from a stated choice experiment involving light bulbs, we illustrate the potential for negative dividends and that the value of programs such as the Energy Star depends on the choice set available to consumers.