Optimal fuel taxation with suboptimal health choices

Simona Sulikova (), Inge van den Bijgaart, David Klenert and Linus Mattauch
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Simona Sulikova: University of Oxford

No 794, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.

Keywords: Transport Externalities; Congestion; Active travel; Fuel; Health Behaviour; Optimal Taxation (search for similar items in EconPapers)
JEL-codes: H23 I12 Q58 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2020-10
New Economics Papers: this item is included in nep-ene, nep-env, nep-hea, nep-pbe, nep-pub and nep-tre
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Working Paper: Optimal fuel taxation with suboptimal health choices (2020)
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