The Incidence of Soda Taxes with Imperfect Information and Strategic Firm Behavior

Using a random coefficient discrete choice model, this paper distinguishes between sales and excise taxes and compares their effectiveness on reducing carbonated soft drink (CSD) consumption. Estimation results show that the magnitude of tax elasticity of demand is much smaller than own price elasticity. Therefore by generalizing the tax nature of sales and excise tax policies and employing price elasticity of demand to assess tax effects, previous studies overestimate the ability of such policies to reduce CSD consumption. Moreover, sales taxes are less effective than excise taxes for controlling soft drink consumption because they are not salient to consumers. Implications of this paper help policy makers focus their efforts to adopt the most appropriate policy instrument and to address obesity issues.