http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/09/behavioural-and-welfare-economics.html

Here’s an idea for some synthesis – people’s choices are rational given the existing set of incentives (which includes social pressures and subconcious “behavioral” incentives) and their discount rate. But there is no “neutral” “pure” “natural” or “free” incentive set, so if you see the existing incentive set creating bad outcomes (morbid obesity, diabetes) then just change the incentive set.

The problem in practice is that in lots of cases this is probably really, really hard. Though I think we oft neglect the full
implications of the theory of bounded rationality – that individual “computation power” and time is limited, so even if people are rational they only have so much bandwith to decide everything rationally. Might just be that, given popcorn and soda in the movies is such a “hardwired” choice, that the Pigovian solution of taxing the beverage may not work well and simply reducing choice is a better option. But who knows?

Also, I really like the “fuzzy” demand curve.

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