Evaluating the Effect of Soda Taxes Using a Dynamic Model of Rational Addiction

39 Pages Posted: 26 Aug 2021

See all articles by Jong Yeob Kim

Jong Yeob Kim

New York University (NYU) - Leonard N. Stern School of Business

Masakazu Ishihara

New York University (NYU) - Leonard N. Stern School of Business

Date Written: July 23, 2021

Abstract

The obesity rate has grown to epidemic proportions in the United States. Recent scientific studies suggest that excess intake of sugar-sweetened beverages (SSBs) is one of the primary contributors to weight gain. One option to address the growing obesity epidemic is to discourage SSB consumption through fiscal policies such as excising a soda tax. In this paper, we apply the Becker-Murphy model of rational addiction to present evidence that consumers are rationally addicted to soda consumption. Motivated by the evidence, we build a dynamic structural model to quantify the impact of soda taxes on soda purchases and consumption and study the role of addiction in influencing this impact. Using the parameter estimates, we conduct counterfactual analyses based on realistic policy scenarios and evaluate how different tax policies would affect soda purchases. The policy experiments indicate that imposing a soda tax of 1 cent per ounce would reduce soda consumption by 28.3% and addiction level by 31.7%. We find that 20.6% of the reduction in consumption is due to the reduction in the addiction level. We further investigate how these taxes affect consumer and social welfare through a change in addiction level. We find that addiction plays a critical role because a mild reduction in addiction level in the Berkeley tax scenario (1 cent per ounce on regular soda) benefits consumer and social welfare; however, in the Philadelphia tax scenario (1.5 cents per ounce on regular and diet sodas), the reduction in addiction level is too large, and both consumer and social welfare are worse off than before.

Keywords: Sin Tax, Sugar-Sweetened Beverages, Rational Addiction, Dynamic Structural Model, Policy Implications

JEL Classification: C11, C35, D12, H20, I18, M38

Suggested Citation

Kim, Jong Yeob and Ishihara, Masakazu, Evaluating the Effect of Soda Taxes Using a Dynamic Model of Rational Addiction (July 23, 2021). Available at SSRN: https://ssrn.com/abstract=3892506 or http://dx.doi.org/10.2139/ssrn.3892506

Jong Yeob Kim (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Masakazu Ishihara

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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