Regulating ingredients in sin goods

Abstract

AbstractIf consumption of unhealthy food is excessive, then a policymaker might respond with a corrective tax. However, she might supplement the tax with a regulatory standard that limits the concentration of an unhealthy ingredient. A tax can restore social efficiency without supplemental regulation if all of four of the following conditions are satisfied: The tax is nutrient specific, the market structure is perfect competition, the magnitude of the distortion is the same across all consumers, and consumers do not react to the tax by substituting to untaxed foods that also have unhealthy ingredients. But if any of these conditions are not met, then there can be benefits to supplementing a corrective tax with a standard.