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Understanding Public Support for Externality-Correcting Taxes and Subsidies: A Lab Experiment

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  • David Heres
  • Steffen Kallbekken
  • Ibon Galarraga

Abstract

The potential of taxation to correcting environmental externalities has been long recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high levels of public acceptance. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or partial information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. We find substantially greater support for subsidies than taxes. This can partially be explained by the expectation that the subsidy will increase payoffs more than a tax, but not because it could be more effective in changing behavior. Furthermore, we find that under partial information, the preference for subsidies is even stronger.

Suggested Citation

  • David Heres & Steffen Kallbekken & Ibon Galarraga, 2013. "Understanding Public Support for Externality-Correcting Taxes and Subsidies: A Lab Experiment," Working Papers 2013-04, BC3.
    • Handle: RePEc:bcc:wpaper:2013-04
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    Cited by:

    1. Adel Shamaileh, 2016. "An Evaluation of the Effectiveness of Environment Policy in Jordan," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(2), pages 1-92, January.
    2. Daniel A. Brent & Lata Gangadharan & Anca Mihut & Marie Claire Villeval, 2019. "Taxation, redistribution, and observability in social dilemmas," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(5), pages 826-846, October.
    3. Buckley, Penelope & Llerena, Daniel, 2022. "Nudges and peak pricing: A common pool resource energy conservation experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 101(C).
    4. Jason Delaney & Sarah Jacobson, 2016. "Payments or Persuasion: Common Pool Resource Management with Price and Non-price Measures," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 747-772, December.
    5. Galarraga, Ibon & Abadie, Luis M. & Ansuategi, Alberto, 2013. "Efficiency, effectiveness and implementation feasibility of energy efficiency rebates: The “Renove” plan in Spain," Energy Economics, Elsevier, vol. 40(S1), pages 98-107.
    6. Penelope Buckley & Daniel Llerena, 2022. "Nudges and peak pricing: A common pool resource energy conservation experiment," Post-Print hal-03765755, HAL.

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    Keywords

    Pigouvian taxes; subsidies; lab experiment; public policy; revenues; effectiveness;
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