Working Paper: CEPR ID: DP13524
Authors: Helmuth Cremer; Catarina Goulao; Jean-Marie Lozachmeur
Abstract: We consider an unhealthy good, such as a sugar-sweetened beverage, the health damages of which are misperceived by consumers. The sugar content is endogenous. We first study the solution under "pseudo" perfect competition. In that case a simple Pigouvian tax levied per unit of output but proportional to the sugar content is sufficient to achieve a first best solution. Then we consider a monopoly. Market power affects both output and sugar content, possibly in opposite directions, and these effects have to be balanced against Pigouvian considerations. We show that, nevertheless, a tax per unit of output achieves an efficient solution, but it must be an affine function of the sugar content; taxing "grams of sugar" is no longer sufficient. Interestingly, both the total tax as well as its sugar component can be positive as well as negative.
Keywords: sin tax; tax incidence; misperception; monopoly
JEL Codes: H22; I12; D42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax (H29) | consumption of unhealthy goods (I12) |
| sugar content (L66) | consumption of unhealthy goods (I12) |
| market power (L11) | inefficient output and sugar content levels (L66) |
| tax structure (H20) | efficiency (D61) |
| tax levels (H29) | consumer behavior (D19) |
| sugar component of tax (H20) | efficiency (D61) |