Pigouvian policies under behavioral motives

Abstract

This study investigates the role of Pigouvian policy when producers and consumers may have direct preferences or “behavioral motives” that cause them to take voluntary actions to address externalities. Building from microfoundations, I construct a model of behavioral motives and analyze their implications for policy. In addition to the damage function, the optimal Pigouvian price will depend upon behavioral responses to policy and normative judgments regarding whether behavioral motives are welfare relevant. The “normative uncertainty” regarding whether behavioral motives are welfare relevant may be even more consequential for the optimal Pigouvian tax than uncertainty regarding the damage function. Thus, focusing solely on careful empirical estimation of behavioral motives is insufficient for setting policy. I elucidate diverse applications for the model and discuss normative implications for existing research on green markets, warm glow, and social and moral norms.