Behavioral Economics

Environmental economics, more so than other areas of economics, faces the problema of
allocating scarce resources with Little to no help from markets. Indeed, environmental economics
is largely defined by market failures-when missing and incomplete markets lead to outcomes that
are not efficient and not socially optimal. The task for enivironmental economics is to use
economic theory to prescribe cost-effective environmental policies that improves upon the failure
of markets. The efforts have led to meaningful improvements in evironmental management, but
the prescriptions have relied heavily on theories that asume people behave in a perfectly rational
and self-called rational choice theory. People are not perfectly rational, do not possess unwavering
willpower, and are not absolutely self-interesed.

If these atributes only caused people to deviate from theory in a random man-ner, theory could
still provide accurate predictions on average. But in many set-tings, particularly those related to
environmental policy, behavior deviates from theory in systematic and predictable ways. For
example, we tend to care are too much about small chances and too Little about future outcomes,
we are concerned with others and about our relative standing to them, and our decisions are
substantially influenced by cues, frames, and default options. Such behavioral tendencies might
not matter too much in some situations, but to the extent that actual behavior patterns deviate
from theoretical predictions, policies that are guided by theories assuming perfect rationally and
self-interest will be less effective and possibly counterproductive.

Behavioral economics seeks to closet he gap between behavior and theory by understanding the
imperfect behavior that theory tends to ignore and using the knowledge to improve the precision
of theory and effectiveness of policy. Increasingly, researches and policymakers are recognizing
the importance of augmeting economic models to incorpórate behavioral elements. In 2010, the
british goverment established the behavioral insights team to help apply knowledge from research
in the behavioral sciences to improve public policies. Results have been very positive. Using
behavioral insights, projects have increased household investment in energy efficiency measures,
improved the rate of regulatory compliance, and dramatically shortened the time for people using
enemployment servicies to find a job. With such success, yhe goverment moved to require that
behavioral science be included ind the required curriculum for civil servants.

Behavioral economics has a lot to say about how society works, but it is particularly relevant to the
concerns of enciromental economics because the gap between behavior and theory is
exacerbated by missing and incomplete markets. This is because rationality is not an individual
concept based on self –reflection; rather it is a social construct that relies on active Exchange that
aggregates and diffuses information. In the absence of well-functioning markets, decisions are
more isolated and therefore more susceptible to our cognitive limts anf biases. Indeed, if
environmental economics is concerned with imperfect behavior. And the two imperfections are
not autonomus. Researches and policymakers have increasingly recognized the need to consider
both market and behavioral imperfections simultaneosly, wich has led to the emergence of
research at the conflunce of behavioral and enviromental economics. This work, generally referred
to as behavioral environmental economics. This work, generally referred to as behavioral
encironmental economics, attemps to improve our understanding of how to design better
mechanisms and policies by compensating for market imperfections while also accounting for
behavioral imperfections.

To illustrate the relevance of behavioral environmental economics , consider the well-documented

energy paradox. Research and field studies consistenly find that people buy fewer energy paradox.
Research and field studies consistenly find that people buy fewer energy conservation products
than predicted by standard models. The energy conservation products than predicted by standard
models. The energy paradox corresponds to behavioral research that finds that people discount
the future too much, exhibit a bias for the status quo, and rely on heuristics complicated
calculations. The policy implication is that people might not respond as expected to changes in
energy prices, wich implies that a carbón tax based on standard models likely will fall short of its
goals. Behavioral research can help identify the best way to make the policy more effective-higher
tax rates, complementary mechanisms like energy efficiency labels, or alternative approaches like
energy efficiency standards.

Behavioral economics has also revealed relevant insights about how people perccive and respond
to environmental risk. Research shows that people systematically misjudge risk, in particular those
with small chances and severe outcomes. Also, people tend to dismiss risk too easily if it is shared
by society, revealed gradually and realized in the future. These misperceptions about risk can lead
to inefficient levels of insurance and protection, as well incorrect valuations for environmental
risks. And considering the risk characteristics of climate change, these behavioral tendecies help
explain the difficulty of implementing meaningful climate policy.

A success story for behavioral environmental economics is the succesful implementation of a

congestion charge in stockholm. The consistent public opposition to Pigouvian instruments is
striking. Energy taxes were rejected by the united states in 1993 and by switzerland in 2000, while
a congestion charge was rejected by Edinburgh in 2005 and by New York City in 2008. These
outcomes could be a result of rational economic and political calculations, buut experimental
research indicates behavioral biases pay a significant role in the opposition. By considering peoples
tendencies, Stockhol policymakers were able to implement a congestion charge via public
referéndum in 2006. To mitigate behavioral biases, the policy prescribed a six motnh trial period
before the referendum to allow people the opportunity to experience the effects of the
mechanism. It worked. The trial run shifted public support by nearly 20 percentages points, wich
led to an approval that seemed unlikely prior to the trial run.

Behavioral research has contributed a great deal to our general understanding of enviromental
management and policy. People are inluenced by context and farming, and they care about their
relative standing in addition to their absolute position. Consequently, the prospects of policy can
depend on labels, reference points, cultural and social norms, and the distribution os costs and
benefits. Research also finds behavioral responses can be differ across different types of
incentives; in particular, peoples good intentions can be diminished with the introduction of
monetary incentives. Such behavioral findings have broad implications. For instance, management
of local stakeholders who participate in a collaborative and shared process, and conversely, can be
harmed by exogenously imposting incentives and institutions.

In the end , behavioral environmental economics recognize that things are complex. Neither
people nor markets live up to the ideals presumed by the estándar theory. Ignoring either of these
facts makes things easier, but it leaves the door open for ineffective and counterproducive
policies. The challenge for behavioral enviromental economics is to gain more comprehensive
understanding of the complexities that exists in people markets, and in turn use that knowledge to
refine theory and improve policy.