Nova workboard

a blog from young economists at Nova SBE

Paternalistic taxation

Over the years, governments have implemented a variety of taxes with the intent of distorting the consumption of certain goods. A good example is the sugar tax imposed by the Portuguese government after the World Health Organization recommended countries to tax sugary drinks, to decrease their consumption. The idea is that by imposing a tax, governments are putting pressure for prices to go up and consumption to go down.

Any classical economist will say that consumers are rational and fully aware of the benefits and costs of all their choices and act accordingly. In that sense, the use of paternalistic taxes to limit consumption of certain goods would lead to a fall in welfare of consumers and therefore it would be best not to tax such goods. However, there is evidence to suggest that people do not behave as rational and make “mistakes” when choosing how much to consume, for example, of sugary
drinks. In such cases, government interventionmay be desirable to correct the overconsumption of unhealthy goods, in hopes that such correction improves individual and social welfare.

Ted O’Donoghue and Matthew Rabin (2006) have discussed the welfare effects of “sin taxes” on unhealthy foods. In their framework, they assumed that consumers do not have 100% of self-control, that is, consumers are aware of the immediate benefits of unhealthy goods but fail to recognize or neglect the long-run costs of such consumption. They concluded that, under these settings, imposing sin taxes and consequently returning the proceeds over to consumers can, in fact, improve social welfare and even create Pareto improvements (where no one is worse off and at least on consumer is better off). This field of behavioural public economics is expanding, and research done seems to point in the same direction. With consumers not behaving according to textbook rational choice models, there is room for government intervention to improve welfare.

From theory to practice, it isimportant to know how much consumption changed after a tax was imposed. Jason M. Fletcher, Partha Deb and Jody L. Sindelar (2009) have gathered data on adolescent to analyse the impact of cigarette taxes on smoking. They found that for smokers with lower levels of self-control are unresponsive to cigarette prices. This seems to suggest that low levels of self-control are linked with addiction, and that prices do not provide enough incentives to quit and that other policies should be put in place. On the other hand, according
to Jornal Economico, after the Portuguese government imposed a tax on sugary drinks, consumption went down 72%, suggesting that the tax was successful.

These results seem to be contradictory, with smoking results going against previous literature. However, it is important to remember that the unresponsiveness of smokers can be due to addiction and to the lack of substitutes, while a decrease in sugary drinks does not necessarily mean a decrease in sugar consumption. For any future policies, it is important to have these effects in mind.

Francisco Monteiro

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Author: studentnovasbe

Master student in Nova Sbe

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