The Policy Prescriptions of Behavioral Economics
The Policy Prescriptions of Behavioral Economics
This chapter discusses the policy prescriptions that arise from the research in behavioral economics. A frequent prescription, in various contexts, is to restrict people's choice set—which falls in the category of strong paternalism. The most compelling case for paternalistic intervention is that of higher taxes for addictive goods, or the so-called sin taxes. Such a tax reduces the current consumption of an addictive good by time-inconsistent consumers; this, in turn, reduces consumption of the good by consumers' future incarnations. Moreover, rivalry should be priced by using Pigovian taxation. The chapter then looks at the mildest form of manipulation—libertarian paternalism—which occurs whenever the government, having decided which outcome is “good” for the people, fools them into making the “right” decision, not by restricting their choices but by framing their choice problem so as to favor the preferred outcome.
Keywords: policy prescriptions, behavioral economics, paternalism, paternalistic intervention, sin tax, Pigovian taxation, libertarian paternalism, addictive goods
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