The effect of low Prices plus informative Nudges on externalities

Abstract

We present the results of a series of laboratory experiments designed to study the effect of different policies to control negative externalities. The experiments consisted of a regulatory environment in which participants faced a uniform tax that is lower than optimal, a nudge, or a combination of a tax and a nudge. We consider a public bad with impacts among either the experiments participants or third parties who were not participants in the experiments. We test whether a descriptive message whose objective is to nudge behaviors towards the internalization of a public bad, implemented together with a tax that is insufficient to induce the optimal level of the externality, adds to the effect of the tax in reducing the negative externality. Our results suggest that the tax is more effective in reducing the level of production than the message. Also, adding a nudge (message) to the tax does not have an additional effect (in both, public bad inside and outside the lab scenarios). Finally, the combined effect of tax and message could be larger under the public bad outside the lab than in the public bad inside the lab scenario.