Dynamic corrective taxes with time-varying salience

Economies across the globe are becoming increasingly cashless and many payment systems have become automated, driving a temporal wedge between consumption and payment and generally making the costs of consumption intermittently salient. Since this inconsistent price salience alters demand elasticities, it is a particular concern for goods that generate externalities and the price-based policies deployed to address them. This paper derives optimal dynamic corrective taxes for suboptimal and persistent consumption decisions. These taxes depend on the agent's ability to commit to a future consumption path. We also characterize a second-best constant tax and the excess burden from time-invariant tax rates. When calibrated to U.S. residential electricity consumption, the model shows that the second-best constant tax is more than twice the marginal external cost of carbon emissions. (c) 2020 Elsevier Inc. All rights reserved.