Labeling by a private certifier and public regulation

This paper considers the effects of labels in a duopolistic market. A label certifies the level of some characteristics of a product. It is shown that under a private certifier, the certification level falls short of both profit maximization for the labeling firm and social welfare maximization. Then, different Government policies aimed to improve on the private certifier outcome are analyzed. (i) If public certification is offered, in competition to private, the private certifier will increase the certification standard of his label and welfare will be improved - even though no firm adopts the public label. (ii) A per unit tax on the unlabeled product and a subsidy to the labeled one, which are often observed or advocated, are shown here to lead to unintended results, while (iii) an ad valorem tax can increase welfare