Cigarette Taxes with Endogenous Addictiveness

Calcott Paul () and Petkov Vladimir P. ()
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Calcott Paul: School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand
Petkov Vladimir P.: School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand

The B.E. Journal of Theoretical Economics, 2015, vol. 15, issue 1, 73-106

Abstract: We examine how a tax on cigarettes would be affected by endogeneity of their addictiveness. In our model, the rationale for government intervention is based on internalities and externalities. While a corrective tax could be imposed to address these two distortions, it may result in excessive nicotine consumption per cigarette. This suggests that tax rates should be moderated. We consider two types of behavior that affect the addictiveness of cigarettes. First, producers can manipulate the nicotine content of tobacco products. Second, consumers are able to adjust the intensity of their smoking. We show that there may still be a case for a corrective tax. However, tax policies and attainable welfare depend on whether the nicotine dose from each cigarette is influenced by producers or consumers.

Keywords: addiction; corrective taxes; nicotine (search for similar items in EconPapers)
JEL-codes: C73 D43 H21 I18 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/bejte-2013-0134

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