Optimal Taxation of Addictive Goods Consumed by Naïve Hyperbolic Discounters
13 Pages Posted: 2 May 2022
Date Written: April 23, 2022
I derive a simple closed-form formula for the optimal tax on addictive goods when consumers with hyperbolic time preferences erroneously and naïvely believe that they will go through with the consumption plan they devise in the present. In the literature, this problem is well studied for sophisticated consumers that are aware of their time-inconsistent behavior. The corresponding analysis for naïve consumers is novel. On the one hand, the optimal steady-state tax rate levied on the naïve consumer exceeds the corresponding tax rate on the sophisticated consumer. This is because the naïve consumer can internalize the intertemporal externality on future selves brought about by consuming the addictive good in the present to a lesser extent than the sophisticated consumer. On the other hand, this naïveté consists in believing that the consumer will behave in a time-consistent manner in the future. Such a belief, albeit wrong, still gives rise to a certain level of internalization of the intertemporal externality. For this reason, the tax rate even on the naïve consumer falls short of the full intertemporal externality.
Keywords: optimal taxation, addictive goods, time inconsistency, hyperbolic discounting
JEL Classification: D91, H21, I18
Suggested Citation: Suggested Citation