@techreport{NBERw17083,
 title = "Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency",
 author = "Garth Heutel",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "17083",
 year = "2011",
 month = "May",
 URL = "http://www.nber.org/papers/w17083",
 abstract = {When consumers exhibit present bias and are time-inconsistent, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal.  I investigate policies aimed at externalities for time-inconsistent consumers.  Welfare-maximizing policy in this case includes an instrument to correct the externality and an instrument to correct the present bias.  Either instrument can be an incentive-based policy or a command-and-control policy.  Calibrated to the US automobile market, simulation results from a model with time-inconsistent consumers suggest that the second-best gasoline tax is 18%–30% higher than marginal external damages.  These simulations also suggest that social welfare is maximized with a gasoline tax set about equal to marginal external damages and a fuel economy tax that increases the price of an average non-hybrid car by about $750–$2200 relative to the price of an average hybrid car.},
}