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Taxing Sin Goods and Subsidizing Health Care

  • Cremer, Helmuth
  • De Donder, Philippe
  • Maldonado, Darío
  • Pestieau, Pierre

We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6777.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6777
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  1. Besley, Timothy, 1988. "A simple model for merit good arguments," Journal of Public Economics, Elsevier, vol. 35(3), pages 371-383, April.
  2. Ted O'Donoghue & Matthew Rabin, 2005. "Optimal Sin Taxes," Levine's Bibliography 784828000000000346, UCLA Department of Economics.
  3. 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.
  4. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  5. Gruber, Jonathan & Koszegi, Botond, 2004. "Tax incidence when individuals are time-inconsistent: the case of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1959-1987, August.
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