Information and the Provision of Quality Differentiated Products

Governments often enact information provision policies to overcome asymmetric information of product qualities. We show that increasing awareness among consumers of the quality of a good can (but will not always) encourage firms to produce goods with higher levels of quality. Even if product qualities increase, social welfare may fall as information provision results in too much product differentiation. We show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality, and we identify conditions under which information provision is welfare enhancing relative to these price instruments