Modeling the Welfare Effects of Advertising: Preference-Shifting Deadweight Loss
36 Pages Posted: 28 Sep 2021 Last revised: 18 Oct 2022
Date Written: September 4, 2021
This paper explores one of normative economic theory’s most nagging omissions: its failure to model the welfare effects of advertising and other forms of marketing – central features of all modern market economies. Technically, the paper relaxes the standard welfarist assumption that preferences are fixed and exogenous and reflect welfare. Although this assumption is not widely accepted in other social sciences, economics generally treats situations in which it does not hold as deviations from the general rule, and therefore of lesser interest. This paper offers an approach to incorporating within the standard model itself the possibility that marketing can change observed behaviors, and perhaps preferences, in non-welfare-enhancing ways. It then explores the consequences of this expanded model for one of the most canonical assertions of optimal tax theory: that taxes produce deadweight loss.
Keywords: taxation, optimal tax, advertising, welfare
JEL Classification: D11,D46,D91,D61,H61,H31,I31,K34,M37
Suggested Citation: Suggested Citation