Clean Technology, Willingness to Pay and Market Size

This paper extends Salop's model of localized competition by introducing the consumers' willingness to pay (WTP) for clean products and allows an individual firm to choose between a clean or a dirty technology. We assume that a clean technology is relatively costly to adopt. The consumer is willing to pay more for a product produced with clean technology and the model can also be interpreted as a world economy model where each firm represents a country. There exists a critical value of m (proportion of firms adopting the clean technology), m*, such that if m < m* then no country adopts the clean technology, all countries adopt the clean technology only if in > m* while some countries will adopt the clean technology and some will not adopt the clean technology if m = m*. Our results also identify an example of coordination failure. Since symmetric technology adoption delivers the same level of profits as non-adoption, global coordination will be necessary to achieve the clean technology adoption outcome. Finally, we demonstrate that the private and public (social planner) incentives to adopt clean technology differ.