American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Optimal Internality Taxation of Product Attributes
American Economic Journal: Economic Policy
vol. 16,
no. 3, August 2024
(pp. 394–419)
Abstract
This paper explores how a benevolent policymaker should optimally tax (or subsidize) product attributes when consumers are behaviorally biased. We demonstrate that market choices are informative about biases, which can be exploited for targeting biased consumers via a nonlinear tax schedule. We show that the properties of this schedule depend on few parameters of the joint distribution of consumer valuations and biases. Furthermore, we provide a novel justification for behaviorally motivated product standards and derive when a combination of taxes and standards is optimal. We illustrate our findings based on a numerical example from the lightbulb market.Citation
Gerster, Andreas, and Michael Kramm. 2024. "Optimal Internality Taxation of Product Attributes." American Economic Journal: Economic Policy, 16 (3): 394–419. DOI: 10.1257/pol.20220416Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- L69 Industry Studies: Manufacturing: Other
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