Free-baiting: policy applications for freeness removal and the zero price effect

Abstract

This paper explores “free-baiting” as a behavioral policy tool for reducing participation in socially undesirable activities. Empirical evidence establishes that when a good or activity ceases to be free, consumption plummets. A free-baiting policy creates conditions of freeness in order to subsequently take advantage of the discouraging effects of freeness removal. The initial free phase shifts consumers’ reference price for the target activity to zero. Subsequently, prices are returned to market levels – a staggering price increase. Behavioral factors enhance the salience of that price increase. It occurs along the steepest part of the money utility curve. It is especially salient because it is presented as a loss. In addition, it may trigger the endowment effect: forcing people to give something up in order to partake in the target activity once it is no longer free. Moreover, these discouraging effects can enhance the efficiency and effectiveness of other interventions. Free-baiting manufactures a policy window, creating a moment in which many consumers simultaneously confront obstacles to the target activity. The effects of free-baiting are illustrated using several hypothetical interventions, including rush-hour roadway tolls, sugary beverages, gasoline and tobacco.