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We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. Welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers. A sufficient statistics approach is informative about the direction of reform, but not about optimal rates when externalities are highly concentrated.
This is an updated version of previous working paper see here.
Authors
CPP Co-Director, IFS Research Director
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
Research Fellow University of Wisconsin
Martin, previously Deputy Research Director, is a Research Fellow at IFS and Professor of Economics at the University of Wisconsin.
Research Fellow London School of Economics
Kate is an IFS Research Fellow and an Assistant Professor at LSE, interested in public finance, industrial organisation and applied microeconomics.
Working Paper details
- DOI
- 10.1920/wp.ifs.2017.W1728
- Publisher
- The IFS
Suggested citation
R, Griffith and M, O'Connell and K, Smith. (2017). Tax design in the alcohol market. London: The IFS. Available at: https://ifs.org.uk/publications/tax-design-alcohol-market (accessed: 29 March 2024).
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