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Do Cigarette Taxes Make Smokers Happier?

  • Jonathan Gruber
  • Sendhil Mullainathan

Abstract

Economists have a well-established framework for understanding the welfare consequences of taxing goods that don’t create externalities. Taxes create dead-weight loss by causing consumers to distort their consumption away from their preferred choices. This cost is weighed against the benefits of government revenue. As established in the seminal analysis of Becker and Murphy (1988), this argument applies equally well to both addictive and nonaddictive goods. The same type of revealed preference arguments that suggest that taxes reduce the welfare of consumers of nonaddictive goods can be extended to “rational addicts”: agents decide to smoke by trading off the long-term costs of consumption against the immediate pleasures of consuming, all the while taking into account the addictive properties of the good in question. This model therefore suggests that the only justification for taxing addictive goods is the interpersonal externalities associated with consumption of those goods.

Keywords

General Social Survey Income Quartile Linear Time Trend State Dummy General Social Survey Data 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Jonathan Gruber and Sendhil Mullainathan 2006

Authors and Affiliations

  • Jonathan Gruber
  • Sendhil Mullainathan

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