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Soda tax incidence and design under monopoly

Author

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  • Cremer, Helmuth
  • Goulao, Catarina
  • Lozachmeur, Jean-Marie

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.

Suggested Citation

  • Cremer, Helmuth & Goulao, Catarina & Lozachmeur, Jean-Marie, 2019. "Soda tax incidence and design under monopoly," CEPR Discussion Papers 13524, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13524
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    References listed on IDEAS

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    1. Cremer, Helmuth & Goulão, Catarina & Roeder, Kerstin, 2016. "Earmarking and the political support of fat taxes," Journal of Health Economics, Elsevier, vol. 50(C), pages 258-267.
    2. Helmuth Cremer & Philippe De Donder & Darío Maldonado & Pierre Pestieau, 2012. "Taxing Sin Goods and Subsidizing Health Care," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(1), pages 101-123, March.
    3. Haavio, Markus & Kotakorpi, Kaisa, 2011. "The political economy of sin taxes," European Economic Review, Elsevier, vol. 55(4), pages 575-594, May.
    4. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    5. Marion Devaux & Franco Sassi & Jody Church & Michele Cecchini & Francesca Borgonovi, 2011. "Exploring the Relationship Between Education and Obesity," OECD Journal: Economic Studies, OECD Publishing, vol. 2011(1), pages 1-40.
    6. Kotakorpi, Kaisa, 2008. "The incidence of sin taxes," Economics Letters, Elsevier, vol. 98(1), pages 95-99, January.
    7. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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    Cited by:

    1. Gonçalves, Judite & Pereira dos Santos, João, 2020. "Brown sugar, how come you taste so good? The impact of a soda tax on prices and consumption," Social Science & Medicine, Elsevier, vol. 264(C).

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    More about this item

    Keywords

    misperception; Monopoly; sin tax; Tax Incidence;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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