Controlling Human Utilization of Failure-Prone Systems via Taxes
Provides theoretical insights for policymakers designing taxes to control shared resource usage when users have behavioral risk preferences.
This paper models resource utilization as a game with prospect-theoretic agents and shows that taxation can counter-intuitively increase usage under network effects, with differentiated taxes leading to higher utilization than uniform taxes.
We consider a game-theoretic model where individuals compete over a shared failure-prone system or resource. We investigate the effectiveness of a taxation mechanism in controlling the utilization of the resource at the Nash equilibrium when the decision-makers have behavioral risk preferences, captured by prospect theory. We first observe that heterogeneous prospect-theoretic risk preferences can lead to counter-intuitive outcomes. In particular, for resources that exhibit network effects, utilization can increase under taxation and there may not exist a tax rate that achieves the socially optimal level of utilization. We identify conditions under which utilization is monotone and continuous, and then characterize the range of utilizations that can be achieved by a suitable choice of tax rate. We further show that resource utilization is higher when players are charged differentiated tax rates compared to the case when all players are charged an identical tax rate, under suitable assumptions.