January 21, 2009
Random Thought About Externalities
I am convinced that there is something in the behavioral economics literature that compares the relative effectiveness of resolving positive externalities through subsidies vs. resolving negative externalities through taxes. (E.g., subsidizing renewable energy vs. taxing fossil fuels.) My hypothesis runs like this: when you apply theories of loss aversion to energy consumption, people will tend to react more strongly (i.e., consume fewer fossil fuels) to the lost purchasing power that comes from paying more for fossil fuels than they would to the gain in purchasing power that comes from paying less for renewables. I have so far found no papers on Google Scholar or elsewhere that address this specific matter, but I think it would make for an excellent experiment.