Abstract

This paper develops a general-equilibrium framework to analyze firms’ incentives to engage in greenwashing and to quantify its impact on prices, production choices, consumer surplus, and pollution levels. Firms choose between “green” and pollutant inputs and decide whether to label their output as eco-friendly, facing fixed labeling costs and imperfect oversight that penalizes deceptive practices. Consumers observe labels but know only the probability that they are truthful, generating an equilibrium price premium that reflects a mix of genuine and fraudulent claims. Results show how greenwashing reduces price of green labeled products, displacing truly green producers and increases pollution output. I also show how the rigor of monitoring and the size of green input subsidies shape both consumer welfare and emissions, revealing policy regimes under which interventions can mitigate greenwashing.

Key Words: Greenwashing, Pollution, Labeling.

JEL codes: D50, D62, Q58, L15.