Sin Taxes: Do Heterogeneous Responses Undercut Their Value?

36 Pages Posted: 21 Jul 2009 Last revised: 30 Jul 2009

See all articles by Padmaja Ayyagari

Padmaja Ayyagari

Department of Economics, University of South Florida

Partha Deb

City University of New York, CUNY Hunter College - Department of Economics

Jason M. Fletcher

University of Wisconsin - Madison - Robert M. La Follette School of Public Affairs; Yale University - School of Public Health

Bill Gallo

Yale University

Jody L. Sindelar

Yale University - School of Public Health; National Bureau of Economic Research (NBER)

Date Written: July 2009

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

Ayyagari, Padmaja and Deb, Partha and Fletcher, Jason M. and Gallo, William and Sindelar, Jody L., Sin Taxes: Do Heterogeneous Responses Undercut Their Value? (July 2009). NBER Working Paper No. w15124. Available at SSRN: https://ssrn.com/abstract=1434638

Padmaja Ayyagari

Department of Economics, University of South Florida ( email )

Tampa, FL 33620
United States

Partha Deb

City University of New York, CUNY Hunter College - Department of Economics ( email )

695 Park Avenue
New York, NY 10021
United States

Jason M. Fletcher

University of Wisconsin - Madison - Robert M. La Follette School of Public Affairs ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States

Yale University - School of Public Health ( email )

PO Box 208034
60 College Street
New Haven, CT 06520-8034
United States

William Gallo

Yale University ( email )

PO Box 208034
60 College Street
New Haven, CT 06520-8034
United States
(203) 785-2854 (Phone)
(203) 785-6287 (Fax)

Jody L. Sindelar (Contact Author)

Yale University - School of Public Health ( email )

PO Box 208034
60 College Street
New Haven, CT 06520-8034
United States
203-785-5287 (Phone)
203-785-6287 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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