Behavioral biases, taxes and welfare Suppose that the health costs of consuming a bag of potato...

 

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Behavioral biases, taxes and welfare Suppose that the health costs of consuming a bag of potato chips are $4 per bag. However, consumers believe that the costs are only $1 per bag. Assume that all consumers are identical in this and other regards, and that there are no externalities or behavioral biases unrelated to health costs from consuming potato chips. (a) What does this imply is the value of "" as defined in lectures (ie., the vertical difference between the market demand curve and the demand curve that would result if consumers were free of behavioral biases)? (b) Is this enough information to determine the optimal tax on potato chips? If so, what is the optimal tax? If not, what more information would you need? Explain briefly. Now suppose additionally that the demand curve is linear, that consumers in total purchase 50 potato chip bags a year when there is no tax, and that a $1 increase in the price of chips reduces demand by 5 bags. (c) What would be the welfare gain from a $1 tax on potato chips (relative to no tax)? (d) What would be the welfare gain from the optimal tax on potato chips (relative to no tax)? Behavioral biases, taxes and welfare Suppose that the health costs of consuming a bag of potato chips are $4 per bag. However, consumers believe that the costs are only $1 per bag. Assume that all consumers are identical in this and other regards, and that there are no externalities or behavioral biases unrelated to health costs from consuming potato chips. (a) What does this imply is the value of "" as defined in lectures (ie., the vertical difference between the market demand curve and the demand curve that would result if consumers were free of behavioral biases)? (b) Is this enough information to determine the optimal tax on potato chips? If so, what is the optimal tax? If not, what more information would you need? Explain briefly. Now suppose additionally that the demand curve is linear, that consumers in total purchase 50 potato chip bags a year when there is no tax, and that a $1 increase in the price of chips reduces demand by 5 bags. (c) What would be the welfare gain from a $1 tax on potato chips (relative to no tax)? (d) What would be the welfare gain from the optimal tax on potato chips (relative to no tax)?

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a The value of as defined in the lectures is the vertical difference between the market demand curve ... View the full answer