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Learning Abatement Costs: On the Dynamics of Optimal Regulation of Experience Goods

Author

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  • Beat Hintermann
  • Andreas Lange
Abstract
We study the introduction of new technologies when their costs are subject to idiosyncratic uncertainty and can only be fully learned through individual experience. We set up a dynamic model of clean experience goods that replace old polluting consumption options and show how optimal regulation evolves over time. In our base setting where social and private learning incentives coincide, the optimal tax of the polluting consumption is increasing over time. However, if social and private learning incentives diverge, we show that it will be optimal to temporarily increase the tax rate beyond net marginal external damages to induce optimal learning, before reducing the tax rate to the steady-state level. Alternatively, one needs to complement the tax by subsidies for first-time users which will be phased out over time. Similar results apply if consumers have biased expectations. We therefore give a rationale for introductory subsidies of new, clean technologies and non-monotonic tax paths from a perspective of consumer learning.

Suggested Citation

  • Beat Hintermann & Andreas Lange, 2012. "Learning Abatement Costs: On the Dynamics of Optimal Regulation of Experience Goods," CESifo Working Paper Series 4058, CESifo.
    • Handle: RePEc:ces:ceswps:_4058
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    References listed on IDEAS

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    Cited by:

    1. Fabio Antoniou & Roland Strausz, 2014. "The Effectiveness of Taxation and Feed-in Tariffs," CESifo Working Paper Series 4788, CESifo.
    2. Baumgartner, Anne & Krysiak, Frank C. & Kuhlmey, Florian, 2022. "Sufficiency without regret," Ecological Economics, Elsevier, vol. 200(C).
    3. Ghadir Asadi & Mohammad H. Mostafavi-Dehzooei, 2022. "The Role of Learning in Adaptation to Technology: The Case of Groundwater Extraction," Sustainability, MDPI, vol. 14(12), pages 1-37, June.

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    More about this item

    Keywords

    experience goods; dynamic regulation; learning by doing; new technology; externalities; pollution;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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