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Sin Taxes: Do Heterogeneous Responses Undercut Their Value?

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  • Padmaja Ayyagari
  • Partha Deb
  • Jason Fletcher
  • William T. Gallo
  • Jody L. Sindelar

Abstract

This paper estimates the price elasticity of demand for alcohol using Health and Retirement Survey data. To account for unobserved heterogeneity in price responsiveness, we use finite mixture models. We recover two latent groups, one is significantly responsive to price but the other is unresponsive. Differences between these two groups can be explained in part by the behavioral factors of risk aversion, financial planning horizon, forward looking and locus of control. These results have policy implications. Only a subgroup responds significantly to price. Importantly, the unresponsive group drinks more heavily, suggesting that a higher price could fail to curb drinking by those most likely to cause negative externalities. In contrast, those least likely to impose costs on others are more responsive, thus suffering greater deadweight loss yet with less prevention of negative externalities.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15124.

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Date of creation: Jul 2009
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Handle: RePEc:nbr:nberwo:15124

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Cited by:
  1. Henry Saffer & Dhaval Dave & Michael Grossman, 2012. "Behavioral Economics and the Demand for Alcohol: Results from the NLSY97," NBER Working Papers 18180, National Bureau of Economic Research, Inc.
  2. Markus Haavio & Kaisa Kotakorpi, 2009. "The Political Economy of Sin Taxes," CESifo Working Paper Series 2650, CESifo Group Munich.
  3. Johansson, Per & Pekkarinen, Tuomas & Verho, Jouko Kullervo, 2012. "Cross-Border Health and Productivity Effects of Alcohol Policies," IZA Discussion Papers 6389, Institute for the Study of Labor (IZA).

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