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Pigovian regulation provides monetary penalties/rewards to incentivize prosocial behavior, and may thereby trigger behavioral effects beyond a more standard response associated with a change in relative prices. This paper quantifies the magnitude of these behavioral effects using data from an experiment on real product choices together with a structural model of consumer behavior. First, we show that information about external effects (products’ embodied carbon emissions) triggers voluntary substitution towards cleaner alternatives, and we estimate that this effect is equivalent to a change in relative prices of GBP30.69-165.15/tCO2. Second, comparing a Pigovian intervention (GBP19/tCO2) with a neutrally-framed price change of the same magnitude, we find a negative behavioral effect associated with regulation. Compensating this bias would require increasing the Pigovian price signal by up to 48.06/tCO2. Finally, based on a cross-product comparison, we show that the magnitude of behavioral effects declines with substitutability between clean and dirty product alternatives, a measure of effort to reduce emissions. more...

Monetary incentives associated with Pigovian regulation may crowd-out intrinsic motivation to mitigate an externality. We quantify this behavioral effect using data from an experiment with real product choices together with a structural model of consumer behavior. First we show that information about products' embodied carbon induces a voluntary shift to cleaner products, and we estimate that intrinsic motivation is equivalent to a change in relative prices of GBP25-167/tCO2. Second, the impact of a Pigovian intervention in proportion to embodied carbon (GBP19/tCO2) suggests significant motivation crowding, and compensating this behavioral bias would require increasing the Pigovian price signal by GBP0.60-170/tCO2. Finally, based on a cross-product comparison, we find that motivation crowding declines with the cost (or effort) of provision. This suggests that, on account of motivation crowding, environmental taxes ought to be set higher for products with price elastic demand. more...