Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201958 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7732
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
A growing literature has shown that behavioral biases influence consumer choices. Such so-called internalities are ubiquitous in many settings, including energy efficiency investments and the consumption of sin goods, such as cigarettes and sugar. In this paper, we use a mechanism design approach to characterize the optimal non-linear tax (or subsidy) for correcting behaviorally biased consumers. We demonstrate that market choices are informative about consumers’ bias, which can be exploited for benevolent price discrimination via a non-linear tax schedule. We derive that such “internality revelation” depends on two sufficient statistics: the correlation between valuations and biases, as well as the signal-to-noise ratio of the bias. Furthermore, we find that there must be a minimum alignment of preferences among the designer and the consumer to ensure internality tax implementability. We contrast our results with the insights from standard non-linear income taxation and discuss that the optimal corrective tax schedule is typically convex. In addition, we apply our findings to the light bulb market and determine the optimal non-linear subsidy for energy efficiency.
Subjects: 
optimal commodity taxation
non-linear taxation
behavioral economics
public economics
internalities
environmental economics
JEL: 
H21
D82
D04
Q58
Document Type: 
Working Paper
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