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Dynamic corrective taxes with time-varying salience

Ben Gilbert () and Joshua Graff Zivin

Journal of Environmental Economics and Management, 2020, vol. 103, issue C

Abstract: Economies across the globe are becoming increasingly cashless and many payment systems have become automated, driving a temporal wedge between consumption and payment and generally making the costs of consumption intermittently salient. Since this inconsistent price salience alters demand elasticities, it is a particular concern for goods that generate externalities and the price-based policies deployed to address them. This paper derives optimal dynamic corrective taxes for suboptimal and persistent consumption decisions. These taxes depend on the agent's ability to commit to a future consumption path. We also characterize a second-best constant tax and the excess burden from time-invariant tax rates. When calibrated to U.S. residential electricity consumption, the model shows that the second-best constant tax is more than twice the marginal external cost of carbon emissions.

Keywords: Salience; Inattention; Optimal taxes; Energy demand; Consumption persistence (search for similar items in EconPapers)
JEL-codes: D03 D11 D62 D91 H21 H23 L97 Q40 Q41 Q50 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Dynamic corrective taxes with time-varying salience (2018) Downloads
Working Paper: Dynamic Corrective Taxes with Time-Varying Salience (2018) Downloads
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DOI: 10.1016/j.jeem.2020.102356

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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