Various economic sectors in Europe, such as the automotive industry, the energy sector or the consumer goods industry, have observed an increased consumer demand for products that aim to have a less negative impact on the environment or on public health. Against this backdrop, this paper analyzes the degree of impact changing consumption behaviour can have on product innovation. In addition, it focuses on the role of government policy in incentivizing consumer switching towards more sustainable products, in particular through the use of differential taxation.

With this aim in mind, the text goes on to explain the roles that businesses, consumers and governments have in a market-based innovation process. To do so, the theoretical concepts of technology-push, i.e. businesses linking innovative technologies to the market, and demand-pull, i.e. consumers developing new demands over time and thereby forcing companies to innovate, are explained. Furthermore, it is outlined, that the government must design policy in such a manner, that barriers to innovation are lifted and that consumers and businesses are free to play their respective roles in the innovation process.

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