Experimental Economics: Applications to Environmental Policy

Incentives, regulations and other policy interventions intended to promote sustainability work through influencing human behaviour. There is therefore much to be gained from a thorough understanding of exactly how various policy interventions relate to the decision-making process. Experimental economics, and the closely related fields of behavioural economics and behavioural finance, apply an empirical approach to study how people act when faced with a range of economic and social scenarios. The experimental approach was pioneered by Vernon Smith and Daniel Kahneman and others, building on early studies by Chamberlin (1948). In recognition of this work, Kahneman and Smith were awarded the 2002 Nobel Prize in Economic Sciences. This paper briefly reviews the applications and methods of experimental economics, relates some key research findings and describes some examples of its use in informing environmental policy.