Energy Policy with Externalities and Internalities
AbstractWe analyze optimal policy when consumers of energy-using durables undervalue energy costs relative to their private optima. First, there is an Internality Dividend from Externality Taxes: aside from reducing externalities, they also offset distortions from underinvestment in energy efficiency. Discrete choice simulations of the auto market suggest that the Internality Dividend could more than double the social welfare gains from a carbon tax at marginal damages. Second, we develop the Internality Targeting Principle: the optimal combination of multiple instruments depends on the average internality of the consumers marginal to each instrument. Because consumers who undervalue energy costs are mechanically less responsive to energy taxes, the optimal policy will tend to involve an energy tax below marginal damages coupled with a larger subsidy for energy efficient products. Third, although the exact optimal policy depends on joint distributions of unobservables which would be difficult to estimate, we develop formulas to closely approximate optimal policy and welfare effects based on reduced form “sufficient statistics” that can be estimated using field experiments or quasi-experimental variation in product prices and energy costs.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17977.
Date of creation: Apr 2012
Date of revision:
Publication status: published as Allcott, Hunt, Sendhil Mullainathan, and Dmitry Taubinsky (Forthcoming). “Energy Policy with Externalities and Internalities.” Journal of Public Economics.
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Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
- L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
- NEP-ENE-2012-04-17 (Energy Economics)
- NEP-ENV-2012-04-17 (Environmental Economics)
- NEP-EXP-2012-04-17 (Experimental Economics)
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