Jeff Wagner, Rochester Institute of Technology

 

Jeff Wagner, Rochester Institute of Technology

SA 4101

October 28, 2011 4:00 PM - 5:30 PM

Economics Seminar presentation by Jeff Wagner, Rochester Institute of Technology

ABSTRACT
We propose a consumption model that captures the impact that perceived price ambiguities may have upon decision-making in green markets in general and in active transportation markets in particular. The basic intuition for the model is that a consumer who may be misperceiving the price of the green good (the active transportation mode) would be willing to pay a positive amount from her income in the current period to resolve the misperception going forward. We posit that the basis for the price misperception in the active transportation context is misperception of the relative risks involved in taking that mode. We derive the analogous compensating variation that aligns perceived and objective risk, and that therefore leaves the consumer indifferent between knowing and not knowing the true price. The compensating variation we derive is different from the existing literature, in that it is with respect to the correction of the price misperception rather than with respect to a change in the real price or the quality/quantity of the product. We show how raising green consumption via price misperception correction can be superior to traditional instruments such as taxing the relatively brown option and subsidizing the relatively green option.

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