Environmental policy when consumers value conformity

Abstract

We present a model of consumer behaviour when consumers value conformity and examine the implications for environmental policy. The model shares a feature set out in Dasgupta, Southerton, Ulph and Ulph (2016) of having a structure of preferences for conformity which induces a mass of consumers to adhere exactly to a norm level of consumption (clumping). However we extend our previous analysis by analysing the conditions for the existence and potential uniqueness of consumption norms. In doing so we introduce threshold effects whereby individuals adhere to a norm only if sufficiently many others do so. Taken together these have striking implications for environmental policy in the case where the norm good generates pollution emissions. Clumping means many individuals will not change behaviour unless the norm changes while threshold effects plus clumping means that it may be hard to change a norm. We show that the use of Pigovian taxes to control behaviour may be either ineffective or welfare reducing, and that the optimal Pigovian tax will work only if it is above some threshold level. There are parameter values for which quantity-based injunctive policies raise welfare relative to no intervention while optimal Pigovian taxes would lower welfare.