Modeling the Welfare Effects of Advertising: Preference-Shifting Deadweight Loss

36 Pages Posted: 28 Sep 2021 Last revised: 18 Oct 2022

Date Written: September 4, 2021


This paper explores one of normative economic theory’s most nagging omissions: its failure to model the welfare effects of advertising and other forms of marketing – central features of all modern market economies. Technically, the paper relaxes the standard welfarist assumption that preferences are fixed and exogenous and reflect welfare. Although this assumption is not widely accepted in other social sciences, economics generally treats situations in which it does not hold as deviations from the general rule, and therefore of lesser interest. This paper offers an approach to incorporating within the standard model itself the possibility that marketing can change observed behaviors, and perhaps preferences, in non-welfare-enhancing ways. It then explores the consequences of this expanded model for one of the most canonical assertions of optimal tax theory: that taxes produce deadweight loss.

Keywords: taxation, optimal tax, advertising, welfare

JEL Classification: D11,D46,D91,D61,H61,H31,I31,K34,M37

Suggested Citation

Seto, Theodore P., Modeling the Welfare Effects of Advertising: Preference-Shifting Deadweight Loss (September 4, 2021). Tax Law Review, Vol. 75, 2022, Loyola Law School, Los Angeles Legal Studies Research Paper No. 2021-24, Available at SSRN:

Theodore P. Seto (Contact Author)

Loyola Law School Los Angeles ( email )

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Los Angeles, CA 90015-1211
United States
213-736-1154 (Phone)
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