"Optimal Taxes for Sin Goods"

by Ted O'Donoghue and Matthew Rabin

Swedish Economic Policy Review, 12(2), 7-39

Abstract

Sin goods, such as potato chips, generate immediate consumption benefits but future health costs. Because self-control problems—in the form of a preference for immediate gratification—can lead people to consume more of such goods than they themselves prefer, there might be scope for regulation to counteract such over-consumption.  We investigate one particular form of regulation: taxes. Imposing simple per-unit taxes (and returning the proceeds to consumers) can generally improve social surplus. Moreover, in some instances, it can be better to use more sophisticated schemes, such as sin licenses, that induce people to make prospective choices about future consumption.