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Sin Taxes: Do Heterogeneous Responses Undercut Their Value?

Author

Listed:
  • Padmaja Ayyagari
  • Partha Deb
  • Jason Fletcher
  • William T. Gallo
  • Jody L. Sindelar

Abstract

This paper estimates the price elasticity of demand for alcohol using Health and Retirement Survey data. To account for unobserved heterogeneity in price responsiveness, we use finite mixture models. We recover two latent groups, one is significantly responsive to price but the other is unresponsive. Differences between these two groups can be explained in part by the behavioral factors of risk aversion, financial planning horizon, forward looking and locus of control. These results have policy implications. Only a subgroup responds significantly to price. Importantly, the unresponsive group drinks more heavily, suggesting that a higher price could fail to curb drinking by those most likely to cause negative externalities. In contrast, those least likely to impose costs on others are more responsive, thus suffering greater deadweight loss yet with less prevention of negative externalities.

Suggested Citation

  • Padmaja Ayyagari & Partha Deb & Jason Fletcher & William T. Gallo & Jody L. Sindelar, 2009. "Sin Taxes: Do Heterogeneous Responses Undercut Their Value?," NBER Working Papers 15124, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15124
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    References listed on IDEAS

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    Cited by:

    1. Johansson, Per & Pekkarinen, Tuomas & Verho, Jouko, 2014. "Cross-border health and productivity effects of alcohol policies," Journal of Health Economics, Elsevier, vol. 36(C), pages 125-136.
    2. Andrew E. Clark & Yarine Fawaz, 2015. "Retirement and the Marginal Utility of Income," Working Papers halshs-01189009, HAL.
    3. Haavio, Markus & Kotakorpi, Kaisa, 2011. "The political economy of sin taxes," European Economic Review, Elsevier, vol. 55(4), pages 575-594, May.
    4. Andrew E. Clark & Yarine Fawaz, 2015. "Retirement and the Marginal Utility of Income," PSE Working Papers halshs-01189009, HAL.
    5. Barrie M. Craven & Michael L. Marlow & Alden F. Shiers, 2013. "The Economics of Minimum Pricing for Alcohol," Economic Affairs, Wiley Blackwell, vol. 33(2), pages 174-189, June.
    6. Henry Saffer & Dhaval Dave & Michael Grossman, 2012. "Behavioral Economics and the Demand for Alcohol: Results from the NLSY97," NBER Working Papers 18180, National Bureau of Economic Research, Inc.
    7. Jason M. Fletcher & Partha Deb & Jody L. Sindelar, 2009. "Tobacco Use, Taxation and Self Control in Adolescence," NBER Working Papers 15130, National Bureau of Economic Research, Inc.
    8. Cahuana-Hurtado, Lucero & Sosa-Rubi, Sandra & Rubalcava-Peñafiel, Luis & Panopoulou, Panagiota & Rodriguez-Oliveros, Guadalupe & Servan-Mori, Edson, 2013. "Understanding the heterogeneous nature of the demand for soft drinks in Mexico: why social determinants also matter," MPRA Paper 61274, University Library of Munich, Germany, revised Jun 2014.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health

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