Price Uncertainty, Tax Policy, and Addiction: Evidence and Implications / Mark Coppejans, Holger Sieg.

Format:

Book

Author/Creator:

Coppejans, Mark.

Contributor:

National Bureau of Economic Research.

Sieg, Holger.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9073.

NBER working paper series no. w9073

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Price Uncertainty, Tax Policy, and Addiction

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

Consumption of addictive goods is subject to habit formation. Forward-looking individuals must, therefore, be concerned about future prices when making current consumption decisions. We study prices for tobacco products based on a unique data set provided by the Bureau of Labor Statistics. Our empirical findings suggest that prices have been highly volatile during the past decade. Price uncertainty has a potentially large impact on the economic well-being of young individuals with relatively low levels of disposable income. We develop a model to study consumption of addictive substances under price uncertainty. Our results indicate that optimal decision rules of low income individuals can crucially depend on subjective beliefs about future prices and the length of the planning horizon. These results imply that tax policies are most effective in reducing teenage cigarette consumption if they credibly alter individuals' beliefs about future prices.

Notes:

Print version record

July 2002.