Valuing rewards and punishments for Prius and Hummer drivers

One of behavioral economics’ seminal insights is that people value gains differently than losses. Most of us are loss averse, which means we prefer to avoid a loss more than we enjoy the satisfaction of a seemingly equivalent gain (ie. losing $100 hurts more than winning $100 despite the identical value of the money involved). Economists who have tried to measure loss aversion have found that the odds of equivalent pain to pleasure are approximately 2:1. People will work to avoid losing $50 about as hard as they will to earn $100.

With that ratio in mind, a new survey from the Mineta Transportation Institute in San Jose, California, that asked California citizens about their preferences for “green” vehicle fees for different types of cars revealed the following finding:

Californians similarly supported another green transportation finance option – a new tax-and-rebate system on all new vehicles based on how much they pollute. People who buy a new vehicle that pollutes very little would receive a rebate of up to $1,000, and people who buy a vehicle that pollutes more would pay a tax up to $2,000. People who buy a vehicle that pollutes about the average amount would not pay a fee or receive a rebate. Sixty-five percent of respondents supported this proposal, and only 30 percent opposed it.

If true, this would seem to indicate a curiously weak disgust for losing money. How did people arrive at these numbers? It turns out that they didn’t. Instead, researchers arrived at those numbers (seemingly) arbitrarily and offered them as an option to people in the survey.

One idea (another idea) is create a new tax and tax REBATE system on all new vehicles base on how much they pollute. People who buy a new vehicle that doesn’t pollute much would receive a rebate of up to $1,000. People who buy a new vehicle that pollutes a lot, such as a very large SUV, would pay a tax up to $2,000. People who buy a vehicle that pollutes about the average would not pay or receive anything. Would you strongly support, somewhat support, somewhat oppose, or strongly oppose that idea?

39% Strongly support

27 Somewhat support

10 Somewhat oppose

20 Strongly oppose

4 Don’t know

Behavioral economics 101 says labeling these “green” vehicle fees rebates and surcharges matters. The wording of this question seems to imply that its author, intentionally or not, placed equal value on the $2,000 penalty, which is framed as a surcharge, and the $1,000 rebate, which is explicitly called a rebate. What’s not clear is in what context this question was offered. Did he view the personal loss of paying $2,000 about equal to the personal gain of saving $1,000? Or did he think about the “green” fees more broadly, with the loss to the environment from a Hummer’s emissions worth $2,000 while the gain to the environment from the Prius’ emissions worth $1,000?

Study author Asha Weinstein Agrawal said in an email that the study “was not designed to test specific price levels that people would be willing to be pay.” Hopefully the Institute, if it chooses to conduct a similar study in the future, will try to measure these preferences. Given what is known about loss aversion, it’s interesting that 30 percent of people opposed this proposal. Did they approve of the “green” fee idea, but simply think the penalty was too high?

Depending on whether people are asked to value their own personal financial utility from paying or saving money, or whether they are asked to individually value the benefits and damages to the earth responses could differ significantly. It’s possible that tax surcharges would only need to be about half the tax rebates ($500) to be seen as comparable. On the other hand, if most Californians think that driving a Prius is as good for the earth as driving a Hummer is bad for it (a big if!), the original rewards and penalties offered in the study may turn out to be about what people would come up with on their own.