Optimal Internality Taxation of Product Attributes

Abstract

This paper explores how a benevolent policymaker should optimally tax (or subsidize) product attributes when consumers are behaviorally biased. We demonstrate that market choices are informative about biases, which can be exploited for targeting biased consumers via a nonlinear tax schedule. We show that the properties of this schedule depend on few parameters of the joint distribution of consumer valuations and biases. Furthermore, we provide a novel justification for behaviorally motivated product standards and derive when a combination of taxes and standards is optimal. We illustrate our findings based on a numerical example from the lightbulb market. (JEL D82, D91, H21, H25, L69)