Taxing Sin Goods and Subsidizing Health Care
23 Pages Posted: 28 Feb 2012
Date Written: March 2012
We study the taxation of sin goods in a two‐period, three‐good model. Individuals can buy health care to compensate for the damages caused by their earlier sin‐good consumption. Individuals are myopic and underestimate the effect of the sinful consumption on health; in their second period, they may acknowledge their mistake or persist in their error. We characterize and compare the first‐best and the (linear) second‐best taxes in these different settings. In particular, we examine how the results are affected by the way sin‐good consumption and health care interact in health production technology.
Keywords: Paternalism, behavioral economics, dual self versus single self
JEL Classification: H21, I18
Suggested Citation: Suggested Citation
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By Frank Cowell