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Design of optimal corrective taxes in the alcohol market

Rachel Griffith (), Martin O'Connell and Kate Smith ()

No W17/02, IFS Working Papers from Institute for Fiscal Studies

Abstract: Alcohol consumption is associated with costs to society due to its impact on crime and health. Tax can lead consumers to internalise these externalities. We study optimal corrective taxation in the alcohol market. We allow for the fact that the externality generating commodity (ethanol) is available in many di fferentiated products, over which consumers might have heterogeneous preferences, and that there may also be heterogeneity in marginal externalities across consumers. We show that, if there is correlation in preferences and marginal externalities, setting different tax rates across products can improve welfare relative to a single tax rate on ethanol. We estimate a model of demand in the UK alcohol market and numerically solve for the optimal tax rates. Moving to an optimal system that taxes alcohol types at different rates would close half of the welfare gap between the current UK system and the fi rst best. Watch IFS researcher, Kate Smith, talking about the design of alcohol taxes. A more recent version of this working paper is available here.

Keywords: externality; corrective taxes; alcohol (search for similar items in EconPapers)
JEL-codes: D12 D62 H21 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea, nep-pbe and nep-pub
Date: 2017-01-31
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Citations: View citations in EconPapers (6) Track citations by RSS feed

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