Behavioral Economics Sin Taxes And Wealth Effects Experiment
1. Sin Taxes and Wealth EffectsExperiment and Policy Suggestion By: Lisa Price
2. IntroductionSin Taxes Government imposed taxes that generate revenue from purchases and consumption that cause negative externalities. Typically they are levied on pleasure or human indulgence and hopefully deter consumption resulting in positive outcomes.
3. Sin TaxEx: Cigarette Sin Tax Taxes on cigarettes increase government revenue, reduces smoking and its related health costs, and saves lives.
5. Consuming unhealthy food results in negative health, social, and economic repercussions A CDC document titled the Morbidity and Mortality Weekly Report stated : overall obesity prevalence in the U.S. is 26.7% an increase of 1.1% from 2007 Obesity creates increased risk for many serious health conditions Coronary heart disease, hypertension, stroke, type II diabetes, certain cancers, and premature death In 2006 medical costs associated with obesity were estimated at $147 billion This report also states that Obesity needs to be addressed through a comprehensive approach including “policies that affect behaviors are critical to monitor progress in obesity prevention and to target interventions”
6. Junk Food Sin Taxes May Result in Health Benefits and alleviate the associated healthcare costs Sin Taxes on Junk Food can be used to: Deter consumption and promote consumption of healthier alternatives A Preventative health measure and to reduce the rate and prevalence of obesity the costs that go with it
7. One Step Further…Sin Taxes and Wealth Effects Socioeconomic status is inversely related to prevalence of obesity Populations with the highest rates of poverty also have the highest rates of obesity Low-socioeconomic groups are disproportionately effected by obesity at all ages
8. Standard Economic Theory People behave in their own best interests Rational people would forgo junk food and move towards healthier options Exponential discounting Peoples choices are time consistent and they know that consuming unhealthy food now will result in negative health effects later Government regulation sin taxes are a form of paternalism Fear of regulatory capture or high cost of implementation People make better choices for themselves than others make for them What type of paternalism is optimal? How can we help guide irrational consumers with a minimal effect on rational consumers?
11. Low Junk Food Prices High Junk Food Prices Sin TaxResults and Analysis 13% reduction in units of junk food purchased when prices increased *Most likely not significant
12. $50 Budget $100 Budget Wealth Effect when Junk Food is High (Taxed)Results and Analysis No apparent wealth effect, in fact slightly the opposite is seen *not significant
13. Weaknesses in the Study Generally Unrealistic Wrong physical setting food or money Not enough options or money to spend on groceries for the week The quantities of the items were unclear Limited choices and Food preferences The taxes may not have been high enough to reach the participants reservation price Assume that participants are educated and of higher than average socioeconomic status Participants had just eaten candy from the previous experiments
14. Discussion People do not always behave rationally in their best interest Hyperbolic discounting People exhibit present biased preferences and chose to consume unhealthy food resulting in immediate gratification even though they may disprove of this choice in the long run Libertarian, Cautious, and Asymmetric Paternalism Policies that help correct people who make errors with minimal effect on rational consumers Education Slight modifications of short-term incentives Easy to change default options Regressive nature of the tax “Revenue-neutral tax changes can sometimes help many B=1(rational). It is easy to construct examples in which all consumers benefit from an increase in taxes on the unhealthy item, by improving the behavior of the B<1 (irrational) consumers while lowering the overall tax burden on the B=1 consumers”. (O’Donoghue and Rabin, 2003) Beneficial because lower income/higher obesity population will be affected more by the tax and therefore it targets and reduces consumption in the population that needs it most
15. Extensions More elaborate and realistic study design or field study More participants and a controlled group Actual shopping atmosphere with real money Optimal taxes should be able to be calculated
16. Policy Thoughts The association of obesity with socioeconomic status is complex but this could be a start Require consumers to buy non-refundable coupons in advance to purchase items Coupons require more foresight and help consumers resist unhealthy present-biased urges Instead of having food stamps be generic for all foods, differentiate them by item With or without sin taxes
This assignment called for running and explaining an experiment or designing a policy to enhance social welfare using insights from behavioral economics. My research essentially merged the two options. Today I will be presenting an experiment that I ran which studied sin taxes and then wealth effects to make a compelling case for policy intervention to reduce the consumption of unhealthy foods.
Form of excise taxes
Given the health benefits of sin taxes and the obesity epidemic it may be appropriate to tax junk food
Exponential discounting, ramsey taxes
Define junk food in terms of exp, 30 items 15 healthy 15 unhealthy
Aggregating the $50 and $100 data to determine overall percentage of quantity consumed
Normalized average dollar amount spent by multiplying $50 Avg $ spent X2 then taking the percentage/100 ($100). If junk food is more money, it will account for a higher % of the budget, therefore the fact that the % spent on junk food is still less than health food is a very conservative measure of how much junk food is consumed. Further, those with the $100 budget spent less on average than those with $50. You would think that the wealth effect would lessen the amount of junk food bought at the higher, taxed, prices when the endowment is only $50. It is unlikely that this result is significant and there are many errors to note.
With only 30 food options, preferences may have played a role. Higher socioeconomic status played a role in decision making even though they had a budget
Better study design makes the results more realistic
