Working Paper BETA #2016-23

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Title : Environmental Incentives: Nudge or Tax?

Author(s) : Benjamin Ouvrard, Sandrine Spaeter

Abstract : We consider a model where individuals can voluntarily contribute to improve the quality of the environment. They di er with regard to their confidence in the announcement made by the regulator about the risk of pollution, modelized in a RDEU model, and to their environmental sensitivity. We compare the efficiency of a tax in increasing individual contributions with the advantages of a nudge based on the announcement of the social optimum to each individual. Under some conditions, a nudge performs better than a tax, in particular, because the individual reaction depends directly on sensitivity, while only indirectly with a tax. Moreover, a nudge does not require information about private contributions, contrary to a tax based on the contributions that are not provided compared to the social optimum. Lastly, its implementation is much cheaper. Yet, some drawbacks are discussed and simulations illustrate our results.

Key-words : incentives; nudge; environmental sensitivity; probability distorsion; tax.

JEL Classification : Q50, D8.