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Optimal Tax Rules for Addictive Consumption

Author

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  • Bossi, Luca
  • Calcott, Paul
  • Petkov, Vladimir

Abstract

This paper studies implementation of the social optimum in a model of habit formation. We consider taxes that address inefficiencies due to negative consumption externalities, imperfect competition, and self-control problems. Our contributions are to: i) account for producers’ market power; and ii) require implementation to be robust and time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.

Suggested Citation

  • Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2011. "Optimal Tax Rules for Addictive Consumption," Working Paper Series 18595, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:18595
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18595
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    References listed on IDEAS

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