Optimal sin taxation and market power

Martin O'Connell and Kate Smith

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study how market power impacts the efficiency and redistributive properties of sin taxation, with an empirical application to sugar-sweetened beverage taxation. We estimate an equilibrium model of the UK drinks market, which we embed in a tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins for drinks create inefficiencies that lower the optimal rate compared with a perfectly competitive setting. Since profits mainly accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting tax policy leads to welfare gains 40% below those at the optimum.

Keywords: externality; corrective tax; market power; profits; redistribution (search for similar items in EconPapers)
JEL-codes: D12 D43 D61 D62 H21 H23 L13 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-10-31
New Economics Papers: this item is included in nep-com, nep-pbe, nep-pub and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in American Economic Journal: Applied Economics, 31, October, 2024, 16(4), pp. 34–70. ISSN: 1945-7782

Downloads: (external link)
http://eprints.lse.ac.uk/122263/ Open access version. (application/pdf)

Related works:
Journal Article: Optimal Sin Taxation and Market Power (2024)
Working Paper: Optimal sin taxation and market power (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122263

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager (lseresearchonline@lse.ac.uk).