Optimal Policy Instruments for Externality-Producing Durable Goods under Present Bias. Heutel, G. Journal of Environmental Economics and Management. 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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