Product Sustainability in Spatial Competition with Consumer Enviromental Awareness

Abstract

Sustainable management of natural stock resources can be promoted through government intervention. This paper analyzes the policies that authorities should use to promote the sustainable use of these resources and the effects on market functioning. A model of differentiated products with environmental regulations and environmentally conscious consumers is applied—the Hotelling’s linear city model. The analysis is conducted from two perspectives: business and society. In the first case, a theoretical regulatory agency establishes the sustainability characteristics and then the level of awareness, and then, privately managed firms compete over characteristics and prices. In the second case, decision-making lies exclusively within the government, with a public manager and an environmental regulator. With both approaches, the sustainable management of natural resources and the promotion of the bioeconomy are optimized when consumer awareness corresponds to consumer preferences. In the business approach, this outcome can be achieved when the authorities have a minimum capacity to raise awareness among the population. Environmental regulation improves competitiveness by reducing prices and product differentiation. This article contributes to the environmental economics and industrial management literature by providing a framework to investigate the effects of awareness campaigns. It is shown that consumer awareness is the key to improving sustainability.