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Cigarette Taxes with Endogenous Addictiveness

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  • Calcott Paul
  • Petkov Vladimir P.

    (School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand)

Abstract

We examine how a tax on cigarettes would be affected by endogeneity of their addictiveness. In our model, the rationale for government intervention is based on internalities and externalities. While a corrective tax could be imposed to address these two distortions, it may result in excessive nicotine consumption per cigarette. This suggests that tax rates should be moderated. We consider two types of behavior that affect the addictiveness of cigarettes. First, producers can manipulate the nicotine content of tobacco products. Second, consumers are able to adjust the intensity of their smoking. We show that there may still be a case for a corrective tax. However, tax policies and attainable welfare depend on whether the nicotine dose from each cigarette is influenced by producers or consumers.

Suggested Citation

  • Calcott Paul & Petkov Vladimir P., 2015. "Cigarette Taxes with Endogenous Addictiveness," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 15(1), pages 1-34, January.
    • Handle: RePEc:bpj:bejtec:v:15:y:2015:i:1:p:34:n:4
    DOI: 10.1515/bejte-2013-0134
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    References listed on IDEAS

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    1. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
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