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Part I: Psychology and the Foundations of Public Finance
- Brookings Institution Press
- Chapter
- Additional Information
15 I Psychology and the Foundations of Public Finance In part 1, we cover some basic lessons of behavioral economics before applying those lessons to topics in public finance in part 2. First, we review what the lessons of behavioral economics are, examining some of the main findings from psychology and behavioral economics, and what they imply for our understanding of preferences and choice. Second, we develop a conceptual framework for integrating behavioral economics and public finance that will pay dividends when we go to apply those findings to topics in public finance. In chapter 2, “Psychology and Economics,” we discuss the range and nature of deviations from the standard economic model of decisionmaking that psychologists and behavioral economists have identified. We focus on the deviations that are most relevant to the topic of public finance and classify them at a level of abstraction amenable to economic analysis. We emphasize three key deviations: imperfect optimization, bounded self-control, and nonstandard preferences. In chapter 3, “Behavioral Economics and Public Finance,” we develop a framework for analyzing the implications of deviations from the standard assumptions on choice and decisionmaking for the methods and conclusions of public finance. We consider the implications of such behavioral tendencies for three sets of challenges that concern public finance: understanding market failures and other sources of welfare loss; assessing the nature and terms of trade-offs involved in setting policy; and designing appropriate and effective policy responses. For each, we identify the general principles of a behavioral approach, which we then apply to the topics of public finance in part 2. Part 02-0498-0 ch2.indd 15 1/3/11 3:27 PM 02-0498-0 ch2.indd 16 1/3/11 3:27 PM ...