What are the best ways for policymakers to encourage desirable behaviors, such as reduced electricity use or higher vaccination rates? A traditional approach points to using price interventions to tax undesirable outcomes and subsidize desirable ones. A more recent literature suggests a different avenue for changing behavior: nudges: policies that change how a choice is presented (information, a reminder, a default, a social comparison) to steer behavior, without changing prices or removing any options . Rather than use monetary incentives, nudges provide information, planning or streamlining in order to boost desirable outcomes. For example, a nudge aimed at increasing vaccine uptake might consist of a “planning prompt,” a reminder that asks the recipient to write down the specific date and time they intend to get their shot.
In this paper, the authors assess the efficacy of nudges compared to price interventions. They refer to estimates (over 1,200) from existing studies (over 600) of nudges and price interventions, averaging effects within market categories (cigarettes, alcohol, influenza vaccination, electricity, and residential water) and comparing price interventions and nudges across three dimensions: effect sizes, cost-effectiveness, and welfare returns: the net benefit a policy delivers to society in dollars, reflecting not just how much behavior changes but how valuable that change is (how much it corrects a genuine mistake or externality) relative to its cost .
They find the following:
- Behavioral interventions generate demand responses that are comparable to substantial price interventions. To replicate the effect of the average nudge for each market category, policymakers would need to impose an 11% tax on electricity, a 28% tax on cigarettes, a 17% tax on water, and a 34% tax on alcohol. Most strikingly, the average impact of the flu-shot nudge is equivalent to a subsidy covering the full price of the vaccine.
- Nudges are more cost-effective than price instruments in all five markets, producing more behavioral change per dollar.
- The picture changes, however, once the authors turn to welfare, which they measure in two ways. First, they measure the welfare gain per dollar of government spending (the beneficiaries’ willingness to pay for the policy, divided by its net cost to the government). While nudges deliver greater welfare returns per dollar, this marginal advantage does not indicate how much total welfare a policy creates. To measure total welfare, the authors calculate the full dollar benefit each instrument delivers when set to its most effective level. Because a nudge can only correct existing behavioral mistakes, its impact is capped, whereas price interventions can be scaled farther. As a result, the authors find that taxes and subsidies deliver greater total welfare than nudges in four of the five markets.
The upshot is that nudges often deliver large effects at low fiscal cost, and they can be powerful complements to taxes and subsidies. But they rarely eliminate the need for price-based policy at scale.