Understanding Support for Cost-Ineffective Environmental Policy Instruments

Many governments use environmental standards rather than more cost-effective market-based instruments like pollution taxes or cap-and-trade. We investigate whether and how economic literacy shapes voter support for cost-ineffective policy instruments. We compare the preferences and beliefs of a probability-based, representative sample of Americans to those of expert environmental economists, and we study the effects of educational videos designed to induce greater economic expertise. In the probability-based sample, respondents prefer the weakest environmental targets for consumer taxes and the strongest targets for standards, suggesting that policymakers face tradeoffs between policy stringency and cost-effectiveness. In contrast to expert environmental economists, these respondents believe that market-based instruments increase consumer energy bills more than standards do. Educational videos explaining pass-through and cost-effectiveness affect policy support and move beliefs in the probability-based sample closer to those of experts. To formally study the economic implications of these results, we develop a model of politically constrained policy design. Political constraints alone can lead market-based instruments to be set below the Pigouvian benchmark, while voters’ imperfect economic literacy can flip the politically constrained planner from choosing a market-based instrument to a less cost-effective standard. We conclude that misunderstanding economic principles is an important reason why voters support cost-ineffective policies.