Optimal Policy Instruments for Externality-Producing Durable Goods under Time Inconsistency

Garth Heutel

No 10-5, UNCG Economics Working Papers from University of North Carolina at Greensboro, Department of Economics

Abstract: Empirical evidence suggests that individual choices often display behavioral anomalies, like time-inconsistent preferences. For example, a household's preferences at the time of purchase of energy-intensive durable goods like cars and appliances may differ from its preferences later on, "underweighting" future operating costs. The standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal under time inconsistency. I investigate how public policies aimed at externalities can be optimally designed when consumers exhibit such behavior. An optimal policy includes an instrument to correct the market failure (externality) and an instrument to correct the behavioral anomaly. Either instrument can be an incentive-based policy or a command-and-control policy; behavioral anomalies do not uniquely warrant command-and-control regulations. I calibrate the model to the US automobile market. Preliminary simulation results suggest that, for cars, the second-best gasoline tax is 18%–45% higher than marginal external damages. The optimal price policy includes a gasoline tax set about equal to marginal external damages and a tax related to a car's fuel economy that increases the price of an average non-hybrid car by about $750–$2200 relative to the price of an average hybrid car.

Keywords: time inconsistency; externality; gasoline; Pigouvian tax (search for similar items in EconPapers)
JEL-codes: Q50 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-09-20
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://bryan.uncg.edu/wp-content/uploads/2018/02/10-05.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:uncgec:2010_005

Access Statistics for this paper

More papers in UNCG Economics Working Papers from University of North Carolina at Greensboro, Department of Economics UNC Greensboro, Department of Economics, PO Box 26170, Bryan Building 462, Greensboro, NC 27402. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Link ().