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Optimal policy instruments for externality-producing durable goods under present bias

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  • Heutel, Garth

Abstract

When consumers exhibit present bias, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for present-biased consumers. Optimal policy includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy (e.g. a tax on fuel economy) or a command-and-control policy (e.g. a fuel economy mandate). Under consumer heterogeneity, a command-and-control policy may dominate an incentive-based policy. Calibrated to the US automobile market, simulation results suggest that the second-best gasoline tax is 3–30% higher than marginal external damages. The optimal price policy includes 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 $550–$2200 relative to the price of an average hybrid car.

Suggested Citation

  • Heutel, Garth, 2015. "Optimal policy instruments for externality-producing durable goods under present bias," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 54-70.
  • Handle: RePEc:eee:jeeman:v:72:y:2015:i:c:p:54-70
    DOI: 10.1016/j.jeem.2015.04.002
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    Cited by:

    1. Motavasseli, Ali, 2016. "Essays in environmental policy and household economics," Other publications TiSEM b32e287e-169b-4e89-9878-1, Tilburg University, School of Economics and Management.
    2. repec:eee:jeeman:v:90:y:2018:i:c:p:181-216 is not listed on IDEAS
    3. repec:eee:jeeman:v:96:y:2019:i:c:p:236-254 is not listed on IDEAS
    4. Soren T. Anderson & James M. Sallee, 2016. "Designing Policies to Make Cars Greener: A Review of the Literature," NBER Working Papers 22242, National Bureau of Economic Research, Inc.
    5. Brent, Daniel A. & Ward, Michael B., 2018. "Energy efficiency and financial literacy," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 181-216.
    6. Heutel, Garth, 2019. "Prospect theory and energy efficiency," Journal of Environmental Economics and Management, Elsevier, vol. 96(C), pages 236-254.
    7. repec:eee:eejocm:v:29:y:2018:i:c:p:1-16 is not listed on IDEAS

    More about this item

    Keywords

    Present bias; Energy policy; Gasoline tax; Quasi-hyperbolic discounting;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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