On Behavioral-Environmental Economics
Shogren, J. F. and L. O. Taylor (2008).
About the authors
Jason Shogren
Laura Taylor
• Stroock Professor of Natural
Resource Conservation and
Management, Economics &
Finance, College of
Business University of Wyoming
• Prof., Environmental Sciences,
Umeå University
• research interests revolve
around the private motives
of public policy
• Professor of Agricultural and
Resource Economics, North
Carolina State University
• Director, Center for
Environmental and Resource
Economic Policy
• CEnREP scholars advise and train
policymakers and practitioners
The authors’ purpose is to expand environmental
and resource economics through behavioral
economics
The authors pose four main questions [p27]:
1. How can behavioral failures affect thinking about
environmental policy?
2. When are behavioral failures relevant to the science of
environmental and resource economics?
3. Is behavioral failure just another form of market failure?
4. Do we have a new behavioral-environmental second-best
problem?
How can behavioral failures affect
thinking about environmental
policy?
Behavioral failure is analogous to market
failure:
Loss
aversion
Coherent
arbitrariness
Preference
reversal
Timeinconsistent
Social preference
for emotive ideas
Bounded rationality, willpower and self-interest
• Entitlements, fairness, endowment effects, self-serving bias etc.
Externalities
Nonrival goods
Nonexcludable benefits
Nonconvexities
Asymmetric information
The taxonomy of failures is used to design policies,
rules and incentives to reverse the failure
?
Liability rules
Marketable permits
Marketable permits
?
?
Collective sharing rules
?
Pigovian taxes
?
Mechanism designs
Behavioral economics explains deviations from “rational
choice” theory. When markets are missing or constructed,
behavioral failures affect policy outcomes. [29]
Rational Choice Theory
Behavioral Economics
• Neoclassical framework
• Equimarginal rule of efficiency
(MC=MB)
• WTP = WTA
• Market-like arbitrage motivates
rational behavior/reverse market
failure
• People can learn to be rational
• Those with complete control offer
nothing to others
• Nonmarket valuation: WTA >
WTP (endowment effect)
• Conflict and cooperation: Rules
affect/are affected by cognitive
bounds
• Willing punishers and conditional
cooperativesUnderestimation of
Risk
• Control: In 40% of observed
bargains, those in control share
their wealth [33]
Behavioral factors influence institutional designs
and mechanism designed to manage market
failures.
• Policy-makers should be interested in how different bargaining rules
and protocols affect behavior and outcomes.
• Bounded selfishness (altruism) and Pigovian tax design (example on p33):
Rational addiction
Myopic and timeinconsistent addictive
behavior
Increased
consumption of
addictive good
Externality resulting
from increased
consumption
Optimal
environmental tax >
standard Pigovian tax
When are behavioral failures relevant
to the science of environmental and
resource economics?
Behavioral failures exist in the tails of the distribution,
and potentially in systemic and institutional designs
resulting in “nontrivial deviations” from efficiency. [34]
• For relevancy to policy-making,
anomalous behaviors ‘must be nontrivial’
• Observed laboratory behavior may not
be great predictor of ‘naturally
occurring’ behavior in non-lab settings.
Rational
behavior (?)
Behavioral
failure
Behavioral
failure
Is behavioral failure just another
form of market failure?
Cognitive and behavioral biases are extensive.
How you relate market and behavioral failures
depends on your perspective.
Continued
market
failure
Behaviora
l failure
Market failure
• Rationality is individually
constructed, hardwired into our
DNA.
• Rationality is socially constructed
through interactions with markets,
and exchange institutions.
• Rationality spillover perspective
sees behavioral failure as a form of
market failure.
Do we have a new behavioralenvironmental second-best
problem?
Theory of Second Best: given 2
imperfections, correcting 1 failure doesn’t
guarantee increased social welfare
“In other words, the absence of any of the jointly necessary conditions does not
imply that the next-best allocation is secured by the presence of all the other
conditions. […] The second-best scenario may require that other of the necessary
conditions for optimality also be absent—maybe even all of them.”
Free Exchange (2007) The Economist
Assuming market and behavioral failures exist
simultaneously, without addressing both could see
reduced social welfare, overall.
Authors argue for adaptive
regulatory schemes to adjust
market-failure regulations for
behavior failures, as they arise.
Nearly impossible to correct all
behavioral failures in one
mechanism (separability
assumption)
In Conclusion…
Researchers need to keep
identifying instances where
rational choice theory
succeeds and fails.
• Environmental and resource economics may suffer if it relies on the
standard model of a rational actor, because that model excludes
behavioral failures of human nature
• BUT behavioral economics evidence is insufficient for a “wholesale
rejection” of rational choice theory.
Critiques
• Are marketable permits really the most effective at correcting behavioral
failures?
• “Marketable permit systems, provided they are active exchange institutions, could be
the most effective behavioral disciplining device, or at a minimum, the institutional
design least affected by behavioral failures” [40]
• Evidence may be insufficient for a “wholesale rejection” of rational choice
theory- but their recommendation was more about increasing
awareness/research and using a strong inference approach. Is this a
sufficient response?
• Discussion of new (soft) paternalism and related justifications for
government intervention into personal choices.
• Which behavioral failures that are the most relevant for environmental
policy?