Governments deploy a wide array of policy tools—and often a combination of policies—to encourage citizens to behave in certain ways and to obtain certain results. For example, gas-guzzling cars are taxed and energy-efficient hybrid and electric cars are subsidized, while the gasoline these vehicles consume is taxed and regulated to reduce carbon and local air pollution. But the implementation of some policy measures can often have unintended consequences. For instance, sales increase on tax-free shopping days but decline in the weeks and months preceding them, perhaps to the point of completely negating the positive impacts of the tax holiday.

In recent years, the federal and state governments have been using a variety of incentives to drive sales of energy-efficient appliances in the United States. The effectiveness of these instruments has been mixed, in part because of the challenges in targeting policies to change consumer behavior.

“Consumers’ responses to tax and subsidy instruments may vary over preferences and income, but also as a function of behavioral biases and transaction costs associated with a given instrument,” argues Associate Professor Joseph Aldy. These so-called ‘microfrictions’ can take many forms, Aldy says, such as customer confusion over prices and policies as well as the opportunity cost of the time and effort necessary to respond to a fiscal policy—such as completing a rebate form. Aldy says that these sorts of microfrictions have important implications for the design of effective fiscal policy.

In a new Harvard Kennedy School Faculty Research Working Paper, Aldy and coauthor Sébastien Houde of the University of Maryland introduce a policy framework which could inform the development of future public policies promoting the purchase of energy-efficient appliances in the United States and energy and climate policies more broadly. 

The authors report several insights from their research:

  • The extent to which microfrictions influence consumers’ behavior varies across the studied policy tools—including energy operating costs (as a proxy for energy taxes and carbon regulation), appliance purchase rebates, sales taxes and sales tax holidays—as well as across income groups in the U.S. population.
  • With respect to the U.S. refrigerator market specifically, lower-income households respond less to shifts in energy costs than upper-income households, but respond more to rebates.
  • In terms of sales taxes and sales tax holidays, higher-income households respond more than lower-income households.
  • Although it may seem wise to combine a tax with a subsidy to encourage consumers to use less energy, the combination rarely works in practice.
  • The presence of a certification program such as Energy Star actually interacts with energy fiscal policies and can lead to unintended consequences.

“This research is important to help guide thinking about how policymakers can leverage instruments in a more effective way—taking into account factors that influence consumer behavior—in order to promote energy conservation, reduce carbon pollution, and lower air pollution,” Aldy says.

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Joseph Aldy

Appointment
Associate Professor of Public Policy
Office Address
79 John F. Kennedy St. Ofer Bldg 403
617-496-7213