Abstract

We examine information provision as a public policy instrument when products generate damages to consumers as well as environmental externalities. We show that information provision dominates taxation in terms of welfare, if information can be provided at low cost. This is because a uniform tax alone levies a heavier than optimal burden on informed consumers and allows the uninformed consumer to free ride partially on the informed consumers’ voluntary actions. If the cost of information provision is substantial, taxation is welfare superior. A policy regime that combines information provision and taxation leads to higher welfare relative to the use of either instrument alone.