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Optimal Internality Taxation of Product Attributes

Author

Listed:
  • Andreas Gerster
  • Michael Kramm

Abstract

This paper explores how a benevolent policymaker should optimally tax (or subsidize) product attributes when consumers are behaviorally biased. We demonstrate that market choices are informative about biases, which can be exploited for targeting biased consumers via a nonlinear tax schedule. We show that the properties of this schedule depend on few parameters of the joint distribution of consumer valuations and biases. Furthermore, we provide a novel justification for behaviorally motivated product standards and derive when a combination of taxes and standards is optimal. We illustrate our findings based on a numerical example from the lightbulb market.

Suggested Citation

  • Andreas Gerster & Michael Kramm, 2024. "Optimal Internality Taxation of Product Attributes," American Economic Journal: Economic Policy, American Economic Association, vol. 16(3), pages 394-419, August.
    • Handle: RePEc:aea:aejpol:v:16:y:2024:i:3:p:394-419
    DOI: 10.1257/pol.20220416
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    Cited by:

    1. Antweiler, Werner, 2024. "Carbon pricing and consumer myopia," Ruhr Economic Papers 1140, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Tingmingke Lu, 2025. "Maximum Hallucination Standards for Domain-Specific Large Language Models," Papers 2503.05481, arXiv.org.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L69 - Industrial Organization - - Industry Studies: Manufacturing - - - Other

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