79 What is a regulatory “nudge”?

There are alternatives to the “command and control”-style regulations we covered in the prior Question, which involved establishing strict limits on certain behaviors like water pollution and then imposing criminal penalties if those limits are exceeded. The first alternative is the idea of a regulatory “nudge”. This principle relies on the idea from behavioral economics that often individuals change their private behavior in response to more slight regulation. For instance, rather than outlawing unhealthy foods, a regulatory nudge might simply require calorie and nutritional information disclosure so that consumers may evaluate those foods and then choose whether to consume them.

A “nudge” has the advantage of letting individuals optimize their own behavior, which may lead to more efficient outcomes. One disadvantage of regulating through nudges is when negative externalities affect others–because these costs are not internalized by the creators of the externality, they may lack sufficient incentive to change behavior based on a nudge. Thus, regulating air or water emissions may be areas in which command-and-control regulations are more effective, while environmental behavior not involving externalities, such as private energy use, may be well-served through nudge-style regulations. We will consider a second alternative to command-and-control regulation in the next Question.