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Optimal Internality Taxation of Product Attributes

Author

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  • Andreas Gerster
  • Michael Kramm

Abstract

This paper explores how a benevolent policy maker 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 non-linear tax schedule. We show that its properties 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," CRC TR 224 Discussion Paper Series crctr224_2024_510, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2024_510
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    More about this item

    Keywords

    Optimal commodity taxation; non-linear taxation; internalities; behavioral economics; public economics; environmental economics;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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