Abstract
This paper develops an analytical framework for studying the Baumol–Oates efficiency of traditional single instrument abatement policies vis-à-vis green defaults in the face of price inertia and passive choice by subpopulations. In this special case of behavioural heterogeneity, command and control approaches can outperform price-based instruments while pure tax/subsidy schemes need to be adjusted in order to achieve politically desired levels of abatement. We also prove that choice-preserving nudges are superior to any single-instrument policy in this case. An average marginal abatement cost rule is developed to optimize the green defaults and traditional policies of standards and prices under different degrees of market rigidity.
Highlights
In recent years, results of behavioral economics have entered the process of developing control instruments in various policy areas
The European Economic and Social Committee has called for an increased inclusion of nudges as a complementary means to policy instruments (EESC [2]). (See Piniewski et al [3], Oullier and Sauneron [4], Council of the Environment and Infrastructure [5] and OECD [6]).) The increased interest in policy instruments based on behavioral results is certainly due to the fact that many instruments based solely on economic incentives do not have the expected effectiveness
As a choice-preserving policy mix, green defaults are superior to any single-instrument policy in this case of behavioural heterogeneity
Summary
Results of behavioral economics have entered the process of developing control instruments in various policy areas. Paternalistic nudges that are not construed by externalities or third-party effects but rather aim "to help the person whose behaviour is altered by nudges” (Loewenstein and Haisley [23]) are suffering from the same basic knowledge problems and lacking normative foundations as any hard paternalistic policy such as prohibition In this regard, the difference between soft and hard paternalism is “one of degree, not one of principle” (Schnellenbach [24]). Hansen and Jespersen [26] differentiate between a non-transparent manipulation of choice and behaviour by means of nudges and a transparent facilitation of behaviour (“empowerment nudges”) While this juxtaposition is stylized (and more work should be done on clarifying the categories), there seems to be a consensus in the literature that technical ‘green defaults’ (e.g., preset double-sided print options) are non-manipulative and ethically defensible (Thaler and Sunstein [15]). We make the economic case for using green defaults as a choice-preserving policy mix of regulatory standards and price-based incentives, which lead to superior results compared to any single-instrument policy in populations that display behavioural heterogeneity
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