Lecture #12.pdf - Choice over time Economics 4374 October 1 2019(Econ 4374 Lecture 12 Choice over time October 1 2019 1 24 Outline 1 Announcements and

Lecture #12.pdf - Choice over time Economics 4374 October 1...

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Choice over time Economics 4374 October 1, 2019 (Econ 4374) Lecture 12 - Choice over time October 1, 2019 1 / 24
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Outline 1 Announcements and Review 2 Behavioral economic rationale for Taxation 3 Taxes and overconsumption of Harmful Products A simple model Behavior under commitment 4 Suboptimal behavior without commitment 5 Projection Bias Evidence on Projection Bias - Temporary fluctuations 6 Implications of Projection Bias (Econ 4374) Lecture 12 - Choice over time October 1, 2019 2 / 24
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Announcements and Review Announcements Assignment 6 due today. Midterm in class October 10 Assignment 7 due the following Tuesday (Econ 4374) Lecture 12 - Choice over time October 1, 2019 3 / 24
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Taxes and overconsumption of Harmful Products Do you think cigarettes should be taxed? Why or why not? Highest rate in U.S. is NYC: City + state tax = $5.85 per pack Lowest rate in U.S. is in Missouri: $0.17 Do you think butter should be taxed? Why or why not? On October 1st 2012, a new tax went into effect in Denmark: an extra 16 kroner (3 USD) per kg of saturated fat ($0.18 per stick of butter). Do you think sugar/sugary drinks should be taxed? Why or why not? Berkeley and Philadelphia were the first two cities to tax sugary drinks in the US, but many have followed with taxes of 1-1.75 cents/oz. (Econ 4374) Lecture 12 - Choice over time October 1, 2019 4 / 24
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Taxes and overconsumption of Harmful Products Behavioral economics proposes a new rationale Time-inconsistent people may do things that are not in their own best interest - based on their own preferences. I Even those who are sophisticated about their time inconsistency? I We will see this in a model. I With a model that captures how consumption can differ from one’s intended consumption, one can try to estimate the parameters and determine an optimal taxation rate that aligns the two. (Econ 4374) Lecture 12 - Choice over time October 1, 2019 5 / 24
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Taxes and overconsumption of Harmful Products A simple model Harmful Products and Hyperbolic Discounting A consumer decides in each of T 3 periods whether to “hit”. I Think of T as very large. Hitting gives her an immediate pleasure of 2 utils (util = a unit of utility), and has a cost of 3 utils in the next period. I So the cost of hitting in period T is in period T + 1, when no decision whether to hit occurs. I Assume utility is zero when no hitting occurs today or occurred yesterday. The consumer is a hyperbolic discounter with β = 1 / 2 and δ = 1. So discounted utility at time t is u t + 1 2 u t +1 + 1 2 u t +2 + 1 2 u t +3 + . . . (Econ 4374) Lecture 12 - Choice over time October 1, 2019 6 / 24
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Taxes and overconsumption of Harmful Products Behavior under commitment Commitment Suppose that self t can commit to her current and future behavior. Whatever happened previously and whatever she plans to do in the future, hitting in period t gives extra discounted utility of how much?
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