On the game of going green: How do consumers, firms, and banks struggle to escape environmental traps?

Abstract

This paper analyzes the complex interactions between consumers, firms, and banks within an evolutionary game model to understand pathways to green sustainability or environmental traps. Our dynamic model examines how individual decisions – consumers choosing green or brown products, firms investing in eco-friendly technologies or paying environmental taxes, and banks offering preferential loan rates for green initiatives – influence broader outcomes. Our findings indicate that environmental traps emerge when there are no initial green consumers in the economy. A steady state in which all consumers, firms, and banks adopt green strategies arises when banks’ net gains from green consumers exceed the cost differential between green and brown firms. This cost differential is determined by the loans offered to each type of firm, weighted by their respective interest rates. Thus, if citizens show strong green preferences and monetary policy provides sufficiently preferential interest rates for green investments, the economy will eventually stabilize in green equilibrium, ensuring environmental sustainability. Numerical simulations support the analytical findings and demonstrate how different values of the model’s parameters can lead to an environmentally responsible economic system against environmental traps.