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The Incidence of Soda Taxes with Imperfect Information and Strategic Firm Behavior

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  • Zheng, Hualu
  • Huang, Lu

Abstract

Using a random coefficient discrete choice model, this paper distinguishes between sales and excise taxes and compares their effectiveness on reducing carbonated soft drink (CSD) consumption. Estimation results show that the magnitude of tax elasticity of demand is much smaller than own price elasticity. Therefore by generalizing the tax nature of sales and excise tax policies and employing price elasticity of demand to assess tax effects, previous studies overestimate the ability of such policies to reduce CSD consumption. Moreover, sales taxes are less effective than excise taxes for controlling soft drink consumption because they are not salient to consumers. Implications of this paper help policy makers focus their efforts to adopt the most appropriate policy instrument and to address obesity issues.

Suggested Citation

  • Zheng, Hualu & Huang, Lu, 2014. "The Incidence of Soda Taxes with Imperfect Information and Strategic Firm Behavior," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170201, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea14:170201
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    References listed on IDEAS

    as
    1. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    2. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
    3. Liu, Yizao & Lopez, Rigoberto & Zhu, Chen, 2013. "How Effective is Public Policy in Decreasing Soda Consumption? An Assessment of Four Policy Options," Working Paper series 155328, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
    4. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
    5. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    6. Barnett, Paul G. & Keeler, Theodore E. & Hu, Teh-wei, 1995. "Oligopoly structure and the incidence of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 57(3), pages 457-470, July.
    7. Bonnet, Céline & Réquillart, Vincent, 2013. "Tax incidence with strategic firms in the soft drink market," Journal of Public Economics, Elsevier, vol. 106(C), pages 77-88.
    8. repec:zwi:journl:v:44:y:2012:i:22:p:2859-2865 is not listed on IDEAS
    9. Dean R. Lillard & Andrew Sfekas, 2013. "Just passing through: the effect of the Master Settlement Agreement on estimated cigarette tax price pass-through," Applied Economics Letters, Taylor & Francis Journals, vol. 20(4), pages 353-357, March.
    10. Rigoberto A. Lopez & Kristen L. Fantuzzi, 2012. "Demand for carbonated soft drinks: implications for obesity policy," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2859-2865, August.
    11. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    12. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
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    Keywords

    Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization; Marketing; Public Economics;

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