Optimal Policy Instruments for Externality-Producing Durable Goods under Present Bias. Heutel, G. Journal of Environmental Economics and Management.
Optimal Policy Instruments for Externality-Producing Durable Goods under Present Bias [link]Paper  doi  abstract   bibtex   
When consumers exhibit present bias, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for present-biased consumers. Optimal policy includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy (e.g. a tax on fuel economy) or a command-and-control policy (e.g. a fuel economy mandate). Under consumer heterogeneity, a command-and-control policy may dominate an incentive-based policy. Calibrated to the US automobile market, simulation results suggest that the second-best gasoline tax is 3%–30% higher than marginal external damages. The optimal price policy includes 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 \$550–\$2200 relative to the price of an average hybrid car.
@article{heutel_optimal_????,
	title = {Optimal {Policy} {Instruments} for {Externality}-{Producing} {Durable} {Goods} under {Present} {Bias}},
	issn = {0095-0696},
	url = {http://www.sciencedirect.com/science/article/pii/S0095069615000297},
	doi = {10.1016/j.jeem.2015.04.002},
	abstract = {When consumers exhibit present bias, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for present-biased consumers. Optimal policy includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy (e.g. a tax on fuel economy) or a command-and-control policy (e.g. a fuel economy mandate). Under consumer heterogeneity, a command-and-control policy may dominate an incentive-based policy. Calibrated to the US automobile market, simulation results suggest that the second-best gasoline tax is 3\%–30\% higher than marginal external damages. The optimal price policy includes 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 \$550–\$2200 relative to the price of an average hybrid car.},
	urldate = {2015-05-01},
	journal = {Journal of Environmental Economics and Management},
	author = {Heutel, Garth},
	keywords = {Energy policy, Gasoline Tax, Present Bias, Quasi-hyperbolic Discounting},
	file = {ScienceDirect Full Text PDF:files/51314/Heutel - Optimal Policy Instruments for Externality-Produci.pdf:application/pdf;ScienceDirect Full Text PDF:files/51838/Heutel - 2015 - Optimal policy instruments for externality-produci.pdf:application/pdf;ScienceDirect Snapshot:files/51315/S0095069615000297.html:text/html;ScienceDirect Snapshot:files/51839/S0095069615000297.html:text/html}
}
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