Document Type
Article
Publication Date
5-2011
Abstract
When consumers exhibit present bias and are time-inconsistent, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for time-inconsistent consumers. Welfare-maximizing policy in this case includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy or a command-and-control policy. Calibrated to the US automobile market, simulation results from a model with time-inconsistent consumers suggest that the second-best gasoline tax is 18%–30% higher than marginal external damages. These simulations also suggest that social welfare is maximized with a gasoline tax set about equal to marginal external damages and a fuel economy tax that increases the price of an average non-hybrid car by about $750–$2200 relative to the price of an average hybrid car.
Recommended Citation
Heutel, Garth, "Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency" (2011). ECON Publications. 6.
https://scholarworks.gsu.edu/econ_facpub/6
Comments
Published as:
Heutel, G. (2011). Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency. National Bureau of Economic Research Working Paper Series, No. 17083. doi: 10.3386/w17083