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Abstract
In economic models of behavior consumers are assumed to value the goods and services they
purchase based on stable preferences over externally identifiable attributes such as
quality. These models predict that consumers will respond to changes in price in a way that is
independent of the source of the price change. Yet research in the behavioral sciences indicates
that consumers that are emotionally attached to a consumption good or other behavior might
respond with resistance when policies threaten their consumption or behavior. Moreover,
policies that in fact validate some emotional attachments can stir a stronger preference for the
good or behavior. Reviewing both survey and experimental data from the literature, we
demonstrate how such emotional responses can create hidden costs to policy implementation that
could not be detected using standard welfare economic techniques. Building upon Rabin’s work
on fairness in games, we propose a partial equilibrium model of emotional response to policy
whereby preferences are endogenous to policy choices. In accordance with evidence both from
our own analysis and the field, we propose that confrontational policies (such as a sin tax)
increase the marginal utility for a good, and that validating policies (such as a subsidy) also
increases the marginal utility for a good. A social planner that ignores potential emotional
responses to policy changes may unwittingly induce significant dead weight loss. Using our
model, we propose a feasible method to determine if emotional deadweight costs exist, and to
place a lower bound on the size of these costs.