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Moral Hazard and Optimal Cigarette Taxation

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  • Gerard Russo

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    (Department of Economics, University of Hawaii at Manoa)

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    Abstract

    This paper views cigarette taxation as a correction for health insurance distortions (an efficiency tax). The theoretical framework utilizes an individual expected utility maximizing consumer-optimal social planner model. From the model an optimal tax formula is derived. There are two main results. First, when indemnification is prohibitive, a subsidy to medical care (reimbursement insurance) may be optimal. Second, when reimbursement is optimal, the optimal cigarette tax (subsidy) depends on the complementarity (substitutability) between medical care and cigarettes as well as moral hazard.

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    File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_89-18.pdf
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    Bibliographic Info

    Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 198918.

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    Date of creation: 1989
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    Handle: RePEc:hai:wpaper:198918

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    1. Dionne, G., 1980. "Moral Hazard and State-Dependent Utility Function," Cahiers de recherche 8053, Universite de Montreal, Departement de sciences economiques.
    2. Cook, Philip J & Graham, Daniel A, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 143-56, February.
    3. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
    4. Stoddart, Greg L. & Labelle, Roberta J. & Barer, Morris L. & Evans, Robert G., 1986. "Tobacco taxes and health care costs : Do Canadian smokers pay their way?," Journal of Health Economics, Elsevier, vol. 5(1), pages 63-80, March.
    5. Green, Jerry & Sheshinski, Eytan, 1976. "Direct versus Indirect Remedies for Externalities," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 797-808, August.
    6. Richard J. Arnott & Joseph E. Stiglitz, 1983. "Moral Hazard and Optimal Commodity Taxation," NBER Working Papers 1154, National Bureau of Economic Research, Inc.
    7. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
    8. Zeckhauser, Richard, 1970. "Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives," Journal of Economic Theory, Elsevier, vol. 2(1), pages 10-26, March.
    9. Hey, John D. & Patel, Mahesh S., 1983. "Prevention and cure? : Or: Is an ounce of prevention worth a pound of cure?," Journal of Health Economics, Elsevier, vol. 2(2), pages 119-138, August.
    10. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
    11. Chernick, Howard A. & Holmer, Martin R. & Weinberg, Daniel H., 1987. "Tax policy toward health insurance and the demand for medical services," Journal of Health Economics, Elsevier, vol. 6(1), pages 1-25, March.
    12. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
    13. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
    14. Feldstein, Martin & Friedman, Bernard, 1977. "Tax subsidies, the rational demand for insurance and the health care crisis," Journal of Public Economics, Elsevier, vol. 7(2), pages 155-178, April.
    15. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
    16. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
    17. Balcer, Yves, 1980. "Taxation of externalities: Direct versus Indirect," Journal of Public Economics, Elsevier, vol. 13(1), pages 121-129, February.
    18. Pauly, Mark V, 1986. "Taxation, Health Insurance, and Market Failure in the Medical Economy," Journal of Economic Literature, American Economic Association, vol. 24(2), pages 629-75, June.
    19. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
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