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Design of optimal corrective taxes in the alcohol market

Author

Listed:
  • Rachel Griffith

    (Institute for Fiscal Studies and University of Manchester)

  • Martin O'Connell

    (Institute for Fiscal Studies and University of Wisconsin)

  • Kate Smith

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

Abstract

Alcohol consumption is associated with costs to society due to its impact on crime and health. Tax can lead consumers to internalise these externalities. We study optimal corrective taxation in the alcohol market. We allow for the fact that the externality generating commodity (ethanol) is available in many di fferentiated products, over which consumers might have heterogeneous preferences, and that there may also be heterogeneity in marginal externalities across consumers. We show that, if there is correlation in preferences and marginal externalities, setting different tax rates across products can improve welfare relative to a single tax rate on ethanol. We estimate a model of demand in the UK alcohol market and numerically solve for the optimal tax rates. Moving to an optimal system that taxes alcohol types at different rates would close half of the welfare gap between the current UK system and the fi rst best. Watch IFS researcher, Kate Smith, talking about the design of alcohol taxes. A more recent version of this working paper is available here.

Suggested Citation

  • Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Design of optimal corrective taxes in the alcohol market," IFS Working Papers W17/02, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:17/02
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    File URL: https://www.ifs.org.uk/uploads/publications/wps/WP201702.pdf
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    References listed on IDEAS

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    Cited by:

    1. Richard M. Bird, 2018. "Are global taxes feasible?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1372-1400, October.
    2. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2020. "One Markup to Rule Them All: Taxation by Liquor Pricing Regulation," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 1-41, February.
    3. Stéphane Gauthier & Fanny Henriet, 2018. "A Fuel Tax Decomposition When Local Pollution Matters," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01826330, HAL.
    4. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    5. Stéphane Gauthier & Fanny Henriet, 2018. "A Fuel Tax Decomposition When Local Pollution Matters," Working Papers halshs-01826330, HAL.
    6. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.

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    More about this item

    Keywords

    externality; corrective taxes; alcohol;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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