|A Theory of Government Regulation of Addictive Bads: Optimal Tax Levels and Tax Incidence for Cigarette Excise Taxation|
with : w8777
The traditional normative analysis of government policy towards addictive bads is carried out in the context of a 'rational addiction' model, whereby the only role for government is in correcting the external costs of consumption of such goods. But available evidence is at least as consistent, if not more so, with an alternative where individuals are 'time inconsistent' about decisions such as smoking, having a higher discount rate between this period and the next than between future periods. We develop this time inconsistent model, and show that this alternative formulation delivers radically different implications for government policy towards smoking. Unlike the traditional model, our alternative implies that there is a role for government taxation of addictive bads even if there are...
Published: Gruber, Jonathan and Botond Koszegi. "Tax Incidence When Individuals Are Time-Inconsistent: The Case Of Cigarette Excise Taxes," Journal of Public Economics, 2004, v88(9-10,Aug), 1959-1987.
|Is Addiction "Rational"? Theory and Evidence|
with : w7507
A standard model of addictive process is Becker and Murphy's rational addiction' model, which has the key empirical prediction that the current consumption of addictive goods should respond to future prices, and the key normative prediction that the optimal government regulation of addictive goods should depend only on their interpersonal externalities. While a variety of previous studies have supported this empirical contention, we demonstrate that these results are very fragile. We propose a new empirical test for the case of cigarettes, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption. We find strong evidence that consumption drops when there are announced future tax increases, providing more robust suppor...
Published: J. Gruber & B. Koszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, vol 116(4), pages 1261-1303.