American Economic Journal:
Applied Economics
ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)
Optimal Sin Taxation and Market Power
American Economic Journal: Applied Economics
vol. 16,
no. 4, October 2024
(pp. 34–70)
Abstract
We study how market power impacts the efficiency and redistributive properties of sin taxation, with an empirical application to sugar-sweetened beverage taxation. We estimate an equilibrium model of the UK drinks market, which we embed in a tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins for drinks create inefficiencies that lower the optimal rate compared with a perfectly competitive setting. Since profits mainly accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting tax policy leads to welfare gains 40 percent below those at the optimum.Citation
O'Connell, Martin, and Kate Smith. 2024. "Optimal Sin Taxation and Market Power." American Economic Journal: Applied Economics, 16 (4): 34–70. DOI: 10.1257/app.20220407Additional Materials
JEL Classification
- D62 Externalities
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- L13 Oligopoly and Other Imperfect Markets
- L25 Firm Performance: Size, Diversification, and Scope
- L66 Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
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