Optimal policies for sin goods and health care: Tax or subsidy?

Abstract

In this paper we examine the optimal policies for sin goods and health care in a two-period economy. Individuals are myopic in the sense that they undervalue the utilities of future consumption and health quality. When investing in health care in the second period, individuals who have previously made myopic decisions may persist in their shortsighted consumption plans (persistent error) or recognize their mistakes (dual self). We show that, for persistent-error myopes, the …rst-best policy mix requires a subsidy on savings and a tax on sin goods. The health care should be taxed (subsidized) if the degree of myopia concerning future consumption is larger (smaller) than that concerning health quality. For dual-self myopes, the optimal policy for sin goods can be either a tax or a subsidy, depending on the relative degrees of myopia and the property of the health quality function.

(No) time to be healthy: Optimal policy with time and monetary investments in health

“…Second, the paper clearly relates to the literature on the optimal policy addressing individuals' health‐related choices when individuals have behavioral biases (e.g., Arbex & Mattos, 2019; Arnabal, 2021; Aronsson & Sjögren, 2016; Aronsson & Thunström, 2008; Cheng & Chu, 2018; Cremer et al., 2012; Gruber & Köszegi, 2001; O’Donoghue & Rabin, 2003, 2006; Pestieau & Ponthiere, 2012). Differently from this paper, these studies focus on the consumption of unhealthy goods, and most of them analyze optimal taxes on such goods (the so‐called sin taxes), with the exceptions of Aronsson and Thunström (2008) who advocate subsidies on wealth and health capital, Arbex and Mattos (2019) who propose an earnings subsidy and Cremer et al.…”

“…Differently from this paper, these studies focus on the consumption of unhealthy goods, and most of them analyze optimal taxes on such goods (the so‐called sin taxes), with the exceptions of Aronsson and Thunström (2008) who advocate subsidies on wealth and health capital, Arbex and Mattos (2019) who propose an earnings subsidy and Cremer et al. (2012) as well as Cheng and Chu (2018) who, in addition to studying sin taxes, consider a subsidy on health care 7 . The paper by Aronsson and Sjögren (2016) is probably the closest to this paper in terms of the policy analyzed since it studies a non‐linear income tax and a linear commodity tax (with the focus, however, on taxing unhealthy goods).…”

“…6 Second, the paper clearly relates to the literature on the optimal policy addressing individuals' health-related choices when individuals have behavioral biases (e.g., Arbex & Mattos, 2019;Arnabal, 2021;Aronsson & Sjögren, 2016;Aronsson & Thunström, 2008;Cheng & Chu, 2018;Cremer et al, 2012;Gruber & Köszegi, 2001;O'Donoghue & Rabin, 2003Pestieau & Ponthiere, 2012). Differently from this paper, these studies focus on the consumption of unhealthy goods, and most of them analyze optimal taxes on such goods (the so-called sin taxes), with the exceptions of Aronsson and Thunström (2008) who advocate subsidies on wealth and health capital, Arbex and Mattos (2019) who propose an earnings subsidy and Cremer et al (2012) as well as Cheng and Chu (2018) who, in addition to studying sin taxes, consider a subsidy on health care. 7 The paper by Aronsson and Sjögren (2016) is probably the closest to this paper in terms of the policy analyzed since it studies a non-linear income tax and a linear commodity tax (with the focus, however, on taxing unhealthy goods).…”

“…7 7 Cheng and Chu (2018) also find that under certain conditions in their setting it may be optimal to subsidize and not to tax sin goods. Goulão and Pérez‐Barahona (2014) study taxes on unhealthy activities and subsidies on health investments in a framework with the intergenerational transmission of noncommunicable chronic diseases. …”