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I just finished reading a new NBER paper that talks about how subsidies for “green” products can be “welfare improving” if people have systematically biased beliefs or other misperceptions about how energy efficient their purchase of durables really is. Here is the paper. Here is the abstract:

We show how the traditional logic of Pigouvian externality taxes changes if consumers under-value energy costs when buying energy-using durables such as cars and air conditioners. First, with undervaluation, there is an “Internality Dividend” from externality taxes: aside from reducing the provision of public bads, they also reduce allocative inefficiencies caused by consumers’ underinvestment in energy efficient durables. Second, although Pigouvian taxes are clearly the preferred policy mechanism when externalities are the only market failure, undervaluation provides an “Internality Rationale” for alternative policies such as product subsidies that reduce the relative price of energy efficient durables. However, when some consumers misoptimize and others do not, a crucial quantity for policy analysis is the average marginal internality: the extent to which a policy preferentially targets misoptimizing consumers. As an example of the importance of the average marginal internality, we carry out a randomized field experiment to provide rebates for energy efficient lightbulbs and illustrate how the welfare effects of the rebate depend significantly on whether consumers that undervalue energy costs are more or less elastic.

I’d give extra credit to anyone who goes section by section through the paper and comments. You’ll notice not a single mention of possible non-greenness of the things they just assert are green, you’ll notice scant discussion of the importance of autonomy, you’ll notice nothing about the “optimality” of the tax policy in terms of the broader environmental objectives (what are they?) and you’ll notice scant appreciation for the possibility that perhaps some of us are not irrationally ignoring future energy cost savings when we purchase various durables – the term uncertainty is massively under-used in the paper (though they do reference some work suggesting that our implicit discount rate on some purchases is in the triple-digit range). And of course, all of these welfare-improving tweaks are done not just for optimal social policy but also for your own happiness, and this all happens via the benevolent working of all-knowing planners in DC and beyond.

I’ll remind you that these are three “terrific” economists and that this sort of a paper is at the fore of our profession. The median view of economists is probably embedded in this paper.

One Response to “Bentham on Taxation, Redux”

  1. Harry says:

    Not looking for extra credit here, in my humble opinion utilitariansm has been trumped by larger metaphysical notions, freedom being one, the signature word of Wintercow. If we argue about who is the best philosopher-king, or the best administrator, to give us pleasure, well, then, we are doomed. Wintercow has repeatedly made this point explicitly and indirectly (by alluding to the coming economic apocalypse).

    I will find the answer to get the extra credit, but not tonight.

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