Much hay has been made over the use of “nudges” in public policy over the past decade or so. This trend may have come to its apex in 2017 when Richard Thaler, co-author of the popular book Nudge, won the Nobel Prize in Economics.
Nudges are behavioral interventions designed to encourage certain behaviors without impinging on the range of choices available to someone. A classic example is the design of food options at a cafeteria. If fruit options are placed at eye level at checkout and pastry options are placed at knee level rather than vice-versa, people are more likely to choose to add fruits to their meals rather than pastries without being deprived of a choice of options.
Nudges are exciting because they allow us to engineer choice architecture to design choices to improve overall well-being while still allowing people to choose different options. It shares this result with another major tool at the disposal of government: taxation and subsidization. These are the bread-and-butter tools we have for reeling in negative externalities and increasing production of goods that have positive spillover effects. By taxing social bads and subsidizing social goods, governments can encourage consumption of goods that benefit society and discourage consumption of goods that harm society without banning choices.
A recent study in the National Bureau of Economic Research’s working paper series compares nudges to more traditional tax and subsidy schemes to assess the relative effectiveness of one strategy over another under different contexts. The three contexts the researchers study are cigarettes, flu vaccinations, and household energy consumption.
For cigarettes, the researchers look at the relative impact of warning labels on cigarette packaging and cigarette taxation, two interventions designed to increase cessation of cigarette use. They find that warnings are more economically efficient than taxation because they are most effective at deterring problem smokers. They even find that warning labels combined with taxes are only marginally more effective than warning labels alone. Point nudging.
The researchers also look at the impact of public campaigns to increase flu vaccination. The researchers find that the optimal subsidy for flu vaccination would be to make them free for the public. They also found that under the most likely scenarios, this would be a more efficient intervention than public vaccination campaigns. By making the flu vaccine free, people would be more likely to get vaccinated than simply seeing ads or other marketing materials encouraging them to get vaccinated. There were some slim scenarios the researchers were not able to rule out where public campaigns could be just as efficient as subsidization, but this still ends up being a point for subsidies.
Lastly, the researchers looked at social comparison nudges to reduce energy consumption versus taxes like a carbon tax. These types of nudges send information to consumers showing how much their neighbors are using energy in order to encourage them to reduce energy use. These nudges have been shown to be effective in experimental studies in the past. Under this scenario, taxes were often seven to eight more efficient than the social comparison nudges. Strong point for taxation/subsidization.
What this study found overall is that under certain circumstances where the population has large differences in internal biases such as cigarette use, nudges are a more efficient way to correct market failure. Under situations where the public generally is biased in the same way, taxes and subsidies are the more efficient tool. This can be a useful rule of thumb for policymakers interested in rooting market-based solutions in the available evidence.