Article
Habits and externalities
Journal of Public Economic Theory
(2024)
Abstract
We develop a conceptual model characterizing two types of individuals, one myopic, the other hyperopic.
A myopic individual ignores his private contributions to both a social and private negative externality, as
well as the effect that his accumulation of stuff (i.e., the stock of consumption goods) has on his habit
parameter. A hyperopic individual internalizes both externalities as well as his habit-formation effect.
We find that the hyperopic individual consumes a greater amount of a clean good and a lesser amount
of a dirty good, with the magnitude of the latter difference being greater than the magnitude of the former.
Consequently, the hyperopic individual’s cumulative consumption of the two goods is lower. The
hyperopic individual’s lower cumulative consumption also contributes to a less-persistent consumption
habit. Further, we explore the extent to which the allocation of consumption across the clean and dirty
goods made by an astigmatic individual (an intermediate type of individual who internalizes the private
externality, as well as the habit-formation effect) diverges from the myopic individual’s allocation. We
consider the implications of our findings for traditional environmental tax policy as it applies to myopic
and astigmatic individuals. Conceptually, we find that Pigovian tax rates in the presence of habit
formation diverge from corresponding standard rates that ignore habit formation based upon the difference
between the magnitudes of the cumulative marginal benefit associated with habit formation and
the marginal cost associated with the accumulation of stuff. Results from a simple numerical analysis
demonstrates these conceptual results and more.
Disciplines
Publication Date
2024
Citation Information
Arthur Caplan. "Habits and externalities" Journal of Public Economic Theory (2024) Available at: http://works.bepress.com/arthur_caplan/150/