Abstract

Quantifying heterogeneity in consumers’ misperceptions of product costs is crucial for policy design.  We illustrate this point in the context of energy-using durables, where there is a long-standing policy debate whether taxes or efficiency standards are superior for regulating externalities.  We estimate heterogeneous perceptions of energy costs and demonstrate that standards outperform taxes for a wide range of compliance costs.  Standards reduce variance in energy operating costs relative to taxes, which ameliorates distortionary effects from misperceptions.  Further, we find it is less important to correctly characterize misperception heterogeneity for setting optimal standards than for taxes.

Co-author: Erica Myers (University of Illinois at Urbana-Champaign)

Practical information