Optimal sin taxation and market power
O'Connell, M. & Smith, K.
(2024).
Optimal sin taxation and market power.
American Economic Journal: Applied Economics,
16(4), 34–70.
https://doi.org/10.1257/app.20220407
(2024).
Optimal sin taxation and market power.
American Economic Journal: Applied Economics,
16(4), 34–70.
https://doi.org/10.1257/app.20220407
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% below those at the optimum.
Explore Further
- D12 - Consumer Economics: Empirical Analysis
- D43 - Oligopoly and Other Forms of Market Imperfection
- D61 - Allocative Efficiency; Cost-Benefit Analysis
- D62 - Externalities
- H21 - Efficiency; Optimal Taxation
- H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- L13 - Oligopoly and Other Imperfect Markets
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O'Connell, M. & Smith, K.
(2024).
Data and code for: Optimal sin taxation and market power.
[Dataset]. OpenICPSR.
https://doi.org/10.3886/e183642
