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Learning Abatement Costs: On the Dynamics of Optimal Regulation of Experience Goods

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  • Beat Hintermann
  • Andreas Lange

Abstract

We study the introduction of new technologies when their costs are subject to idiosyncratic uncertainty and can only be fully learned through individual experience. We set up a dynamic model of clean experience goods that replace old polluting consumption options and show how optimal regulation evolves over time. In our base setting where social and private learning incentives coincide, the optimal tax of the polluting consumption is increasing over time. However, if social and private learning incentives diverge, we show that it will be optimal to temporarily increase the tax rate beyond net marginal external damages to induce optimal learning, before reducing the tax rate to the steady-state level. Alternatively, one needs to complement the tax by subsidies for first-time users which will be phased out over time. Similar results apply if consumers have biased expectations. We therefore give a rationale for introductory subsidies of new, clean technologies and non-monotonic tax paths from a perspective of consumer learning.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4058.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4058

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Related research

Keywords: experience goods; dynamic regulation; learning by doing; new technology; externalities; pollution;

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References

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  1. Dirk Bergemann & Juuso Välimäki, 2006. "Dynamic Pricing of New Experience Goods," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 713-743, August.
  2. Ronald Goettler & Karen Clay, 2006. "Price Discrimination with Experience Goods: a Structural Econometric Analysis," 2006 Meeting Papers 723, Society for Economic Dynamics.
  3. Joseph Farrell, 1986. "Moral Hazard as an Entry Barrier," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 440-449, Autumn.
  4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  5. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
  6. Weitzman, M.L., 1993. "On the 'Environmental' Discount Rate," Harvard Institute of Economic Research Working Papers 1625, Harvard - Institute of Economic Research.
  7. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  8. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  9. Erdem, Tulin & Imai, Susumu & Keane, Michael, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," MPRA Paper 52516, University Library of Munich, Germany.
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