Soda tax incidence and design under monopoly

Abstract

Health damages of an unhealthy good, such as a sugar-sweetened beverage, are misperceived by consumers. Market power affects both output and sugar content and these effects have to be balanced against Pigouvian considerations. Under “pseudo” perfect competition, a Pigouvian tax proportional to sugar content is sufficient to achieve a first best solution. Under monopoly, a specific tax on output achieves an efficient solution, but it must be an affine function of the sugar content. The calibrations of the French and US markets illustrate that both the total tax as well as its sugar component can be positive or negative.

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Reference

Helmuth Cremer, Catarina Goulão, and Jean-Marie Lozachmeur, “Soda tax incidence and design under monopoly”, TSE Working Paper, n. 19-992, February 2019, revised July 2020.