Abstract:
Consumers increasingly care about the environmental quality of the goods they consume. However, limited attention impairs consumers' ability to compare and evaluate the environmental quality of goods. I show that investments in environmental quality, consumer surplus, producer surplus, and welfare are non-monotonic functions of attention. Average environmental quality, consumer surplus, producer surplus, and welfare are highest under intermediate (but different) levels of atten-tion. In addition, limited attention influences the effectiveness of policy interventions. I identify conditions under which emission taxes, subsidies, information campaigns, and mandatory disclosure lead to less investments in environmental quality, more emissions, lower consumer surplus, or lower welfare.