Galle Paper: Externalities, Internalities, and When to Use Nudges

Brian D. Galle of Georgetown has written The Problem of Intra-Personal Cost.  Here is the abstract:

“Externalities”, or harms to others, provide a standard justification for government intervention in the private market. There is less agreement over whether government is justified in correcting “internalities,” or harms to self the self is largely powerless to avoid. While some of the internality dispute is philosophical, some is practical. Critics suggest government lacks information to regulate internalities, and that any intervention would inefficiently distort a private market for self-help. In this Article, I show that these critiques of regulation overlook well-established tools of externality regulation, as well as a burgeoning literature on the measurement of internalities.

Having answered the “should” question, I move on to “how?” I examine the established tools of externality regulation, and consider to what extent the standard advice of the externality literature extends to internality regulation. I find some surprising results, such as that “carrots” may at times be an attractive alternative to “sticks,” and that even large taxes on internalities can produce a so-called “double dividend.” I also compare the traditional regulatory options to “nudges” and other forms of cognitively-informed government interventions. I show a set of cases in which nudges may be preferable to either taxes or command and control regulation.

Thus, my analysis also helps to resolve a second, related, debate over the propriety of nudges. The nudge debate has almost exclusively revolved around whether nudges avoid philosophical objections to paternalistic government regulation. I offer instead a new reason to employ nudges in some cases: they are more efficient.

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