Social planning and coercion under bounded rationality with an application to environmental policy

Beat Hintermann and Thomas F. Rutherford ()
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Thomas F. Rutherford: University of Wisconsin at Madison

International Tax and Public Finance, 2017, vol. 24, issue 5, No 6, 854-878

Abstract: Abstract We develop a theory of social planning with a concern for economic coercion, which we define as the difference between consumers’ actual utility and the “counterfactual” utility they expect to obtain if they were able to set policy themselves. Reasons to limit economic coercion include protecting minorities and preventing disenfranchised groups from engaging in socially costly behavior, or political economy considerations. If consumers are fully rational, we show that limiting coercion is equivalent to placing more welfare weight on coerced consumers at the expense of others. If, however, consumers’ rationality is bounded, counterfactual utility becomes endogenous to current policy, and the welfare loss associated with limiting coercion increases. We set up a numerical version of our model and find that the bias-related welfare loss can be substantial.

Keywords: Coercion; Social planning; Public finance; Environmental taxation; Public provision (search for similar items in EconPapers)
JEL-codes: D03 D04 H21 H22 H23 H31 H41 Q58 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10797-016-9433-0

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