The traditional financial rationale for Pigouvian taxes assumes that they have an effect on conduct by growing the worth of taxed items and never by altering folks’s underlying preferences for them. For instance, a carbon tax reduces driving by making gasoline dearer, however it in any other case leaves folks’s want to drive unchanged. This conclusion follows from the usual assumption in economics that individuals’s tastes and preferences are fastened and decided exogenously to public coverage.

Opposite to plain evaluation, I argue that Pigouvian taxes can in actual fact form preferences and that policymakers ought to think about using them for that objective. A carbon tax, as an illustration, wouldn’t solely make driving dearer, it may additionally modify preferences such that individuals develop a style for various modes of transportation—making driving much less fascinating, even when we ignore the rise in fuel costs.

I make an authentic contribution to the literature on Pigouvian taxes by explaining intimately the psychological mechanisms via which these taxes can alter preferences. I additionally argue that when we loosen up the idea of fastened preferences, the already sturdy case for Pigouvian taxes usually turns into much more compelling. Particularly, desire endogeneity implies that the loss in client utility ensuing from Pigouvian taxes will usually be smaller than normal evaluation suggests. Furthermore, malleable preferences dramatically develop the potential scope for Pigouvian taxes and improve their impression on conduct via a social multiplier impact that may make taxes more practical in attaining public coverage targets than students have historically assumed. I illustrate these factors in quite a lot of policy-relevant contexts, together with environmental legislation, gun management, and public well being coverage.

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