TY  - JOUR
AU  - Heutel,Garth
TI  - Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17083
PY  - 2011
Y2  - May 2011
UR  - http://www.nber.org/papers/w17083
L1  - http://www.nber.org/papers/w17083.pdf
N1  - Author contact info:
Garth Heutel
Bryan 466, Department of Economics
University of North Carolina at Greensboro
P. O. Box 26170
Greensboro, NC 27402
Tel: 336/334-4872
Fax: 336/334-5580
E-Mail: gaheutel@uncg.edu
AB  - 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.
ER  -