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Title: Soda tax incidence and design under monopoly

Author(s): Helmuth Cremer, Catarina Goulao and Jean-Marie Lozachmeur

Publication Date: February 2019

Keyword(s): misperception, Monopoly, sin tax and Tax Incidence

Programme Area(s): Public Economics

Abstract: We consider an unhealthy good, such as a sugar-sweetened beverage, the health damages of which are misperceived by consumers. The sugar content is endogenous. We first study the solution under "pseudo" perfect competition. In that case a simple Pigouvian tax levied per unit of output but proportional to the sugar content is sufficient to achieve a first best solution. Then we consider a monopoly. Market power affects both output and sugar content, possibly in opposite directions, and these effects have to be balanced against Pigouvian considerations. We show that, nevertheless, a tax per unit of output achieves an efficient solution, but it must be an affine function of the sugar content; taxing "grams of sugar" is no longer sufficient. Interestingly, both the total tax as well as its sugar component can be positive as well as negative.

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Bibliographic Reference

Cremer, H, Goulao, C and Lozachmeur, J. 2019. 'Soda tax incidence and design under monopoly'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13524