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Taxing Sin Goods and Subsidizing Health Care

Author

Listed:
  • Pestieau, Pierre
  • Cremer, Helmuth
  • De Donder, Philippe
  • Maldonado, Darío

Abstract

We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.

Suggested Citation

  • Pestieau, Pierre & Cremer, Helmuth & De Donder, Philippe & Maldonado, Darío, 2008. "Taxing Sin Goods and Subsidizing Health Care," CEPR Discussion Papers 6777, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6777
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    References listed on IDEAS

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    1. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
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    More about this item

    Keywords

    Behavioral economics; Dual vs single self; Paternalism;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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