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Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency

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  • Garth Heutel

Abstract

When consumers exhibit present bias and are time-inconsistent, the standard solution to market failures caused by externalities--Pigouvian pricing--is suboptimal. I investigate policies aimed at externalities for time-inconsistent consumers. Welfare-maximizing policy in this case includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy or a command-and-control policy. Calibrated to the US automobile market, simulation results from a model with time-inconsistent consumers suggest that the second-best gasoline tax is 18%-30% higher than marginal external damages. These simulations also suggest that social welfare is maximized with 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 $750-$2200 relative to the price of an average hybrid car.

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  • Garth Heutel, 2011. "Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency," NBER Working Papers 17083, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17083
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    2. Koichiro Ito & James M. Sallee, 2018. "The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel Economy Standards," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 319-336, May.
    3. Minwook Kang & Lei Wang, 2019. "Pareto criterion and long-term perspective criterion under myopic discounting," Economics Bulletin, AccessEcon, vol. 39(1), pages 24-32.
    4. Yildiz, Özgür, 2014. "Lehren aus der Verhaltensökonomik für die Gestaltung umweltpolitischer Maßnahmen [Lessons from behavioral economics for the design of environmental policy measures]," MPRA Paper 59360, University Library of Munich, Germany.
    5. Allcott, Hunt & Mullainathan, Sendhil & Taubinsky, Dmitry, 2014. "Energy policy with externalities and internalities," Journal of Public Economics, Elsevier, vol. 112(C), pages 72-88.
    6. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 3-28, Winter.
    7. Charles Courtemanche & Garth Heutel & Patrick McAlvanah, 2015. "Impatience, Incentives and Obesity," Economic Journal, Royal Economic Society, vol. 125(582), pages 1-31, February.
    8. Sallee, James M. & West, Sarah E. & Fan, Wei, 2016. "Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations," Journal of Public Economics, Elsevier, vol. 135(C), pages 61-73.
    9. Hunt Allcott, 2014. "Paternalism and Energy Efficiency: An Overview," NBER Working Papers 20363, National Bureau of Economic Research, Inc.
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    12. Tsvetanov, Tsvetan & Segerson, Kathleen, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Paper series 148295, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
    13. Caroline Dieckhöner, 2012. "Does Subsidizing Investments in Energy Efficiency Reduce Energy Consumption?: Evidence from Germany," SOEPpapers on Multidisciplinary Panel Data Research 527, DIW Berlin, The German Socio-Economic Panel (SOEP).
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    More about this item

    JEL classification:

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

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