When do Fat Taxes Increase Consumer Welfare?

Jayson L. Lusk, Oklahoma State University - Main Campus
Christiane Schroeter, California Polytechnic State University - San Luis Obispo

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8 pages.

This is the pre-peer reviewed version of the following article: When do Fat Taxes Increase Consumer Welfare?, Christiane Schroeter, Health Economics, Copyright © 2011 John Wiley & Sons., which has been published in final form at http://dx.doi.org/10.1002/hec.1789.

Abstract

Previous analyses of fat taxes have generally worked within an empirical framework in which it is difficult to determine whether consumers benefit from the policy. This note outlines on simple means to determine whether consumers benefit from a fat tax by comparing the ratio of expenditures on the taxed good to the weight effect of the tax against the individual’s willingness to pay for a one-pound weight reduction. Our empirical calculations suggest that an individual would have to be willing to pay about $1500 to reduce weight by one pound for a tax on sugary beverages to be welfare enhancing. The results suggest either that a soda tax is very unlikely to increase individual consumer welfare or that the policy must be justified on some other grounds that abandon standard rationality assumptions.