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Learning Abatement Costs: On the Dynamics of Optimal Regulation of Experience Goods

Author

Listed:
  • Beat Hintermann
  • Andreas Lange

Abstract

We study the introduction of new technologies when their costs are subject to idiosyncratic uncertainty and can only be fully learned through individual experience. We set up a dynamic model of clean experience goods that replace old polluting consumption options and show how optimal regulation evolves over time. In our base setting where social and private learning incentives coincide, the optimal tax of the polluting consumption is increasing over time. However, if social and private learning incentives diverge, we show that it will be optimal to temporarily increase the tax rate beyond net marginal external damages to induce optimal learning, before reducing the tax rate to the steady-state level. Alternatively, one needs to complement the tax by subsidies for first-time users which will be phased out over time. Similar results apply if consumers have biased expectations. We therefore give a rationale for introductory subsidies of new, clean technologies and non-monotonic tax paths from a perspective of consumer learning.

Suggested Citation

  • Beat Hintermann & Andreas Lange, 2012. "Learning Abatement Costs: On the Dynamics of Optimal Regulation of Experience Goods," CESifo Working Paper Series 4058, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4058
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp4058.pdf
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    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    2. Tülin Erdem & Susumu Imai & Michael Keane, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 5-64, March.
    3. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
    4. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    5. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    6. Weitzman Martin L., 1994. "On the Environmental Discount Rate," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 200-209, March.
    7. Ronald Goettler & Karen Clay, 2006. "Price Discrimination with Experience Goods: a Structural Econometric Analysis," 2006 Meeting Papers 723, Society for Economic Dynamics.
    8. Joseph Farrell, 1986. "Moral Hazard as an Entry Barrier," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 440-449, Autumn.
    9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    10. Dirk Bergemann & Juuso Välimäki, 2006. "Dynamic Pricing of New Experience Goods," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 713-743, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    experience goods; dynamic regulation; learning by doing; new technology; externalities; pollution;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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