Tax, Command . . . or Nudge?: Evaluating the New Regulation

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  • August 3, 2015

This Article compares for the first time the relative economic efficiency of “nudges” and other forms of behaviorally inspired regulation against more common policy alternatives, such as taxes, subsidies, or traditional quantity regulation. Environmental economists and some legal commentators have dismissed nudge-type interventions out of hand for their failure to match revenues and informational benefits taxes can provide. Similarly, writers in the law and economics tradition argue that fines are generally superior to nonpecuniary punishments.

Drawing on prior work in the choice-of-instruments literature, and contrary to popular wisdom, Professor Galle shows that nudges may out-perform fines, other Pigouvian taxes, or subsidies in some contexts. These same arguments may also imply the superiority of some traditional “command and control” regulations over their tax or subsidy alternatives. Professor Galle then applies these lessons to a set of contemporary policy controversies, such as New York City’s cap on beverage portion sizes, climate change, retirement savings, and charitable contributions.