Optimal Prosocial Nudging

Abstract

Nudges typically influence choices to align with individuals’ own long-term interests, addressing internalities. Increasingly, they are also used to reduce externalities like environmental damage, i.e., prosocial nudging. This paper examines optimal prosocial nudges of two kinds: pure nudges that affect perceived relative prices and moral nudges affecting individuals’ moral utility. Our findings highlight that prosocial nudges are particularly important when optimal taxes cannot be implemented, and when nudges can better target the externalities, including non-atmospheric externalities. The optimal level of the nudge depends on aspects such as the extent of the externality and internality, the nudgeability of consumers, the cost of providing the nudge, and to what extent the government considers direct individual welfare effects in terms of moral utility. The analysis is extended to account for heterogeneous individuals, revealing additional scope for nudging related to targeting based on individuals' varying nudgeability and contributions to externalities.