Working Paper: NBER ID: w17977
Authors: Hunt Allcott; Sendhil Mullainathan; Dmitry Taubinsky
Abstract: We analyze optimal policy when consumers of energy-using durables undervalue energy costs relative to their private optima. First, there is an Internality Dividend from Externality Taxes: aside from reducing externalities, they also offset distortions from underinvestment in energy efficiency. Discrete choice simulations of the auto market suggest that the Internality Dividend could more than double the social welfare gains from a carbon tax at marginal damages. Second, we develop the Internality Targeting Principle: the optimal combination of multiple instruments depends on the average internality of the consumers marginal to each instrument. Because consumers who undervalue energy costs are mechanically less responsive to energy taxes, the optimal policy will tend to involve an energy tax below marginal damages coupled with a larger subsidy for energy efficient products. Third, although the exact optimal policy depends on joint distributions of unobservables which would be difficult to estimate, we develop formulas to closely approximate optimal policy and welfare effects based on reduced form "sufficient statistics" that can be estimated using field experiments or quasi-experimental variation in product prices and energy costs.
Keywords: Energy policy; Externalities; Internalities; Social welfare; Energy efficiency
JEL Codes: D03; D04; D11; H21; H22; H23; L51; L62; L97; Q41; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal combination of policy instruments (E61) | tailored policy based on average internality (D78) |
| responsiveness of consumers to energy taxes (H31) | valuation of energy costs (Q41) |
| energy taxes (H23) | improved social welfare (I39) |
| energy taxes (H23) | internality dividend (G31) |
| internality dividend (G31) | improved social welfare (I39) |