Consuming tobacco, alcohol, or fatty foods may be instantly pleasurable, but can result in long-run negative health consequences. The resulting self-control problems may justify the use of so called sin-taxes. This line of argument is controversial among economists because of its paternalistic implications. Furthermore, existing evidence suggests that non-constant discounting, giving rise to self-control problems, is not economically significant.
In this working package, we first theoretically study sin taxes in a model with non-fully altruistic consumers and habit formation. We specifically analyze how to internalize externalities that parents’ food consumption choices might have on their future children’s behavior. We further plan to empirically test whether sin taxes can be an efficient tool when people with low self-control adjust their demand in response to a tax change. We exploit tax reforms in Denmark –where soft drink taxes were raised in 2012 and repealed in 2014– to estimate the pass-through of the tax changes on prices as well as differential demand responses by consumers’ levels of self-control. We further develop a structural model of demand with persistence and stockpiling that explicitly accounts for addictive-like habit formation.