Corrective tax design in oligopoly: an application to soda taxes

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Event Type: 
Brown Bag
Date and Time: 
Thursday, November 15, 2018
12:00 pm – 1:00 pm
Martin O'Connell
Institute for Fiscal Studies

The effectiveness of corrective taxes depends on how individuals switch their consumption in response to price rises, to what extent firms re-optimize their prices, and how the tax is structured. We study the optimal design of soda taxes, taking account of the re-optimization of both consumers and firms, and comparing a tax levied directly on sugar with the volumetric and ad valorem taxes used in practice. Using novel longitudinal data on both soda purchased for at home and on-the-go consumption, we estimate demand and pricing competition in the market. We simulate the optimally set tax rates and show that there are significant gains to be had from levying tax directly on the sugar in soda.