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Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency

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  • Garth Heutel

Abstract

When consumers exhibit present bias and are time-inconsistent, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for time-inconsistent consumers. Welfare-maximizing policy in this case includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy or a command-and-control policy. Calibrated to the US automobile market, simulation results from a model with time-inconsistent consumers suggest that the second-best gasoline tax is 18%–30% higher than marginal external damages. These simulations also suggest that social welfare is maximized with a gasoline tax set about equal to marginal external damages and a fuel economy tax that increases the price of an average non-hybrid car by about $750–$2200 relative to the price of an average hybrid car.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17083.

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Date of creation: May 2011
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Publication status: published as " How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shock s . " Review of Economic Dynamics , Vol. 15, No. 2 (April 2012), 244 - 264.
Handle: RePEc:nbr:nberwo:17083

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Cited by:
  1. Caroline Dieckhöner, 2012. "Does Subsidizing Investments in Energy Efficiency Reduce Energy Consumption?: Evidence from Germany," SOEPpapers on Multidisciplinary Panel Data Research 527, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Papers 07, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  3. Charles J. Courtemanche & Garth Heutel & Patrick McAlvanah, 2011. "Impatience, Incentives, and Obesity," NBER Working Papers 17483, National Bureau of Economic Research, Inc.
  4. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.
  5. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working papers 2011-24, University of Connecticut, Department of Economics.
  6. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," NBER Working Papers 17766, National Bureau of Economic Research, Inc.

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