Optimal Tax Rules for Addictive Consumption

Luca Bossi, Paul Calcott and Vladimir Petkov

No 18595, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: This paper studies implementation of the social optimum in a model of habit formation. We consider taxes that address inefficiencies due to negative consumption externalities, imperfect competition, and self-control problems. Our contributions are to: i) account for producers’ market power; and ii) require implementation to be robust and time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.

Keywords: dynamic externalities; internalities; addiction; optimal taxation; time consistent implementation (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:18595

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