Working Paper: NBER ID: w24103
Authors: Sébastien Houde; Joseph E. Aldy
Abstract: The behavioral responses to taxes and subsidies are often subject to various behavioral biases and transaction costs—what we define as “microfrictions.” We develop a theoretical framework to show how these microfrictions—and their heterogeneity across the population and policy instruments—affect the design of Pigouvian policies. Standard Pigouvian pricing still holds with transaction costs, but requires adjustment with behavioral biases. We use transaction-level data from the US appliance market to estimate the heterogeneous behavioral responses to an array of energy fiscal policies and to quantify microfrictions. We then assess optimal fiscal policies and find that it is rarely optimal to couple a Pigouvian tax on energy with an investment subsidy in this context. We also find that energy labels—intended to increase the salience of energy information—can interact in perverse ways with both taxes and subsidies.
Keywords: energy fiscal policies; behavioral responses; Pigouvian policies; microfrictions; energy efficiency
JEL Codes: H31; Q4; Q48; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| microfrictions (F12) | consumer response to energy fiscal policies (Q48) |
| behavioral biases (D91) | optimal corrective tax setting (H21) |
| heterogeneity in behavioral biases (D91) | use of multiple instruments for single externality (C36) |
| coupling Pigouvian tax with investment subsidy (H23) | suboptimal policy design (H21) |
| energy star certification (Q48) | reduced behavioral response to energy operating costs (D91) |
| behavioral biases (D91) | disproportionate impact on lower-income households (H31) |