Introduction

The findings of behavioural economics and happiness research pose serious challenges for public policy analysis. Key findings relate to•externality (people's happiness depends on what others have)•mistakes (which arise from ignorance or misforecasting of happiness), and•tastes (which are not exogenous but affected by public policy).In this special issue the author discusses how to modify the traditional framework to allow for these uncomfortable facts, and how to exploit our new knowledge about how income and other variables affect happiness.