How Income Inequality Shapes Demand-Induced Clean Innovation and the Transition to Clean Technology

Technical change plays a crucial role in improving environmental quality, while the influence of demand-side factors remains insufficiently examined. To clarify the pull effect of consumer demand on the transition to clean technology, this study develops a model of directed technical change incorporating quality innovation in consumer goods. The analysis shows that the relative prices and market sizes of clean consumer goods drive the transition to clean technology, generating a direct demand-induced pull for clean innovations. Income inequality determines the market size of clean relative to dirty goods, thereby shaping innovation incentives and influencing the effectiveness of environmental policies. By integrating learning-by-doing and demand-induced innovation for dirty and clean technologies, respectively, the model captures the path dependence of technological progress and explains the dynamic ‘U-shaped’ evolution of environmental quality under environmental policy intervention. These findings provide theoretical insight into how consumer heterogeneity and income distribution affect the direction of innovation and the long-term transition toward cleaner technologies.