Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/242929 
Year of Publication: 
2021
Series/Report no.: 
IFS Working Paper No. W21/30
Publisher: 
Institute for Fiscal Studies (IFS), London
Abstract: 
This paper studies the design of sin taxes when firms exercise market power. We outline an optimal tax framework that highlights how market power impacts the efficiency and redistributive properties of sin taxation, and quantify these effects in an application to sugar-sweetened beverage taxation. We estimate a detailed model of demand and supply for the UK drinks market, which we embed in our tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins on drinks create allocative distortions, which act to lower the optimal rate compared with a perfectly competitive setting. However, since profits accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting the optimal sugar-sweetened beverage tax rate leads to welfare gains that are 40% below those at the optimum. We show that moving from a single tax rate on sugar-sweetened beverages to a multi-rate system can result in further substantial welfare gains, with much of these gains realized by instead taxing sugar content directly.
Subjects: 
externality
corrective tax
market power
profits
redistribution
JEL: 
D12
D43
D61
D62
H21
H23
L13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.