Optimal Sin Taxation and Market Power

Martin O'Connell and Kate Smith

American Economic Journal: Applied Economics, 2024, vol. 16, issue 4, 34-70

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 percent below those at the optimum.

JEL-codes: D62 H21 H23 H25 L13 L25 L66 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Optimal sin taxation and market power (2024)
Working Paper: Optimal sin taxation and market power (2021)
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DOI: 10.1257/app.20220407

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