Working Paper: NBER ID: w12784
Authors: Edward L. Glaeser; Gergely Ujhelyi
Abstract: The government has responded to misleading advertising by banning it, engaging in counter-advertising and taxing the product. In this paper, we consider the social welfare effects of those different responses to misinformation. While misinformation lowers consumer surplus, its effect on social welfare is ambiguous. Misleading advertising leads to overconsumption but that may be offsetting the under-consumption associated with monopoly prices. If all advertising is misinformation then a tax or quantity restriction on advertising maximizes social welfare. Other policy interventions are inferior and cannot improve on a pure advertising tax. If it is impossible to tax misleading information without also taxing utility increasing advertising, then combining taxes or bans on advertising with other policies can increase welfare.
Keywords: misleading advertising; social welfare; government regulation
JEL Codes: A1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misleading advertising (M38) | overconsumption (E21) |
| misleading advertising (M38) | consumption levels (E21) |
| tax or quantity restriction on advertising (M38) | social welfare (I38) |
| taxes or bans on advertising + other policies (M38) | welfare (I38) |
| counteradvertising (M38) | overall advertising costs (M37) |
| counteradvertising (M38) | welfare (I38) |