Priceless behaviours: behavioural implications, unintended consequences and spillover effects of pricing policies

Despite being one of the most common interventions to address market failures, there are many examples of unsuccessful fiscal policies, including situations where price interventions have resulted in less desirable outcomes than the initial ones. This chapter reviews some of the behavioural explanations to these policy flops, bringing examples from actual policies and from the scientific literature, and explores how fiscal measures could be made more effective by accompanying them with non-price interventions. Our focus is especially on the unsolved challenge of anticipating substitution pattern when consumers are exposed to taxes or subsidies. To this purpose, we discuss the operational definition and measurement of prices when they refer to categories of goods rather than individual products on the shelf, and how aggregation may misrepresent consumer behaviours and undermine economic predictions. We explore a variety of behavioural dimensions that matter in understanding consumer response to price changes, including reference prices and loss aversion, subjective perceptions of the price-quality relationship, mental accounting and fungibility of budgets, habits and addictions, and saliency of taxes.