How to tax addictions

Addiction is most often a problem of self-control. If one is not capable of factoring in the future consequences of one's actions, one way to make this is taken into account is to distort prices appropriately. This is what taxes (and subsidies) are good at. While we know rather well how to design taxes on externalities born by others or the community, the case is more difficult for externalities inflicted on future selves.



Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.

Is chocolate milk hip?

Sports and energy drink have become popular in the past decades or rather dubious grounds, as the recover and boost effect claimed in ads are in many cases false. See for example Vitamin water and Gatorade. In fact, plain water has much better recuperating properties than most of these sports drinks. And so does apparently chocolate milk, which has prompted marketing campaigns in the US with many athletes as spokespersons.

Senarath Dharmasena and Oral Capps, Jr. try to find the determinants of the demand for chocolate milk using a Heckman two-step demand model. Unfortunately, no regression results are presented, but the authors hint at a few interesting results. A quarter of all US households consume chocolate milk, with an average of 12 liters a year per household. Then they claim a number of household characteristics are significant, but with no indication in which way they are. For example, education of the household head is significant, and Hispanic household head as well. It would be interesting to know whether the relationship is positive or not. And as the authors ask in their title whether chocolate milk is the new-age sports drink, I am intrigued as how they could have answered this question. There is nothing in the paper itself about it.

Why am I reporting on such a thin paper? Because it always struck me how Europeans view adults drinking milk and especially chocolate milk as childish, while is it perfectly accepted in the US. I was wondering whether this difference could be seen in an empirical demand equation. Not in that one, though.