Taxing and Regulating Vices

We study the optimal taxation and regulation of sin goods – goods that are enjoyable to consume but also create future negative health consequences – within a setting in which individuals are time‐inconsistent (and thus consume too much), regulation makes the consumption of sin goods less pleasurabl...

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Bibliographic Details
Published in:	The Scandinavian journal of economics Vol. 122; no. 2; pp. 622 - 647
Main Authors:	Immordino, Giovanni, Menichini, Anna Maria C., Romano, Maria Grazia
Format:	Journal Article
Language:	English
Published:	Oxford Blackwell Publishing Ltd 01-04-2020
Subjects:	Compliance Consumers Consumption Consumption restrictions Heterogeneity hyperbolic preferences Optimal taxation Regulation sin goods Taxation
Online Access:	Get full text
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Summary:	We study the optimal taxation and regulation of sin goods – goods that are enjoyable to consume but also create future negative health consequences – within a setting in which individuals are time‐inconsistent (and thus consume too much), regulation makes the consumption of sin goods less pleasurable, and taxation involves administrative and compliance costs. In contrast to previous literature, we find that regulation can be beneficial even when corrective taxes are available and individuals are homogeneous. Moreover, despite the inefficiencies associated with the use of both instruments, the consumption of the sin good might fall short of the first best. The results are robust to consumers’ heterogeneity.
Bibliography:	We thank Alberto Bennardo, Emilio Calvano, Marco Ottaviani, Antonio Rosato, and two anonymous referees, as well as the participants of several seminars and conferences for their insightful comments which greatly improved the paper. The authors are research fellows at the Center for Studies in Economics and Finance (CSEF). All errors are our own.
ISSN:	0347-0520 1467-9442
DOI:	10.1111/sjoe.12334