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We use public finance sufficient statistic approaches to characterize the welfare effects of
“nudges,” such as simplified information and warning labels, in markets with taxes and endogenous
prices. While many studies focus on average effects, we show that welfare also depends on
how the nudge affects the variance of choice distortions, and average effects become irrelevant
with zero pass-through or optimal taxes. We implement the framework with experiments evaluating
automotive fuel economy labels and sugary drink health labels. Labels decrease purchases
of low-fuel economy cars and sugary drinks but may decrease welfare, because they increase the
variance of choice distortions.
