Evaluating the Effect of Soda Taxes Using a Dynamic Model of Rational Addiction

Abstract

The obesity rate has grown to epidemic proportions in the United States. Recent scientific studies suggest that excess intake of sugar-sweetened beverages (SSBs) is one of the primary contributors to weight gain. One option to address the growing obesity epidemic is to discourage SSB consumption through fiscal policies such as excising a soda tax. In this paper, we apply the Becker-Murphy model of rational addiction to present evidence that consumers are rationally addicted to soda consumption. Motivated by the evidence, we build a dynamic structural model to quantify the impact of soda taxes on soda purchases and consumption and study the role of addiction in influencing this impact. Using the parameter estimates, we conduct counterfactual analyses based on realistic policy scenarios and evaluate how different tax policies would affect soda purchases. The policy experiments indicate that imposing a soda tax of 1 cent per ounce would reduce soda consumption by 28.3% and addiction level by 31.7%. We find that 20.6% of the reduction in consumption is due to the reduction in the addiction level. We further investigate how these taxes affect consumer and social welfare through a change in addiction level. We find that addiction plays a critical role because a mild reduction in addiction level in the Berkeley tax scenario (1 cent per ounce on regular soda) benefits consumer and social welfare; however, in the Philadelphia tax scenario (1.5 cents per ounce on regular and diet sodas), the reduction in addiction level is too large, and both consumer and social welfare are worse off than before.