Three Essays on the Economics of Changing Behavior With Costly Policy Instruments.

Attempts to influence individual behavior with public policy are numerous and diverse. The analysis of Pigouvian taxation famously proves that each behavior to be controlled can be analyzed and the optimal policy determined without reference to other behaviors. This result is predicated on the policy instrument, a tax, being a costless transfer from the private individual to the government. The private loss in taxes paid are exactly offset by the public gain of tax receipts. Actual policies used to control behavior, including taxation, do incur administrative costs. In the notable case of incarceration, the policy collects none of the private losses in the form of tax revenue. When policy instruments are costly, the optimal policy to influence each behavior must account for the effects on all other behaviors. This dissertation defines the optimal Pigouvian taxes when there are multiple activities which cause externalities and administration of the tax system is costly. A number of restrictions on the tax system and resulting welfare implications are discussed. An analysis of the criminal justice system suggests that punishments for one crime should be related to the change in the crime rate for each other crime, weighted by the harm caused by each instance of those crimes. A new definition for deterrence and incapacitation is offered, which bears on the relationships among crimes as well as defining the empirical test for whether criminal behavior is rational, in that it can be represented by complete, transitive and reflexive preferences over activities.PhDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/113603/1/danjaqua_1.pd

The Case for Subsidizing Harm: Constrained and Costly Pigouvian Taxation with Multiple Externalities

Many activities are subsidized despite generating negative externalities. Examples include needle exchanges and energy production subsidies. We explain this phenomenon by developing a model in which the policymaker faces constraints or costs. We highlight three examples. First, it may be optimal to subsidize a harmful activity if the policymaker cannot set the first-best tax on an externally harmful substitute. Second, it may be optimal to subsidize a harmful production process if the activity mix at lower levels of output uses more harmful activities than the activity mix at higher levels of output. Third, it may be optimal to subsidize a harmful activity if there is a large administrative cost associated with taxing a harmful substitute. We also show how the functional form of the cost of administering a Pigouvian tax affects the optimal tax. When administrative cost is a function of only tax rates, the policymaker should tax each activity. However, an increase in the tax presents a tradeoff: lower externality, but higher administrative cost. A subsidy may be optimal for some externally harmful activities. When administrative cost is a function of only activity levels, it may not be optimal to tax every activity. If it is optimal to tax all of the activities, the policymaker should set the tax equal to the externality plus the marginal administrative cost. If it is not optimal to tax every activity, the complementarity between activities comes into play and it may be optimal to subsidize externally harmful activities