The Impact of Soda Taxes on Consumer Welfare: Implications of Storability and Taste Heterogeneity

52 Pages Posted: 9 Apr 2015

See all articles by Emily Yucai Wang

Emily Yucai Wang

University of Massachusetts, Amherst

Date Written: November 26, 2014

Abstract

The typical analysis on the effectiveness of soda taxes relies on price elasticity estimates from static demand models, which ignores consumers inventory behaviors and their persistent tastes. This article provides estimates of the relevant price elasticities based on a dynamic demand model that better addresses potential inter-temporal substitution and unobservable persistent heterogeneous tastes. It finds that static analyses overestimate the long-run own-price elasticity of regular soda by 60.8%, leading to overestimated consumption reduction of sugar-sweetened soft drinks by up to 57.9% in some cases. Results indicate that soda taxes will raise revenue but are unlikely to substantially impact soda consumption.

Keywords: Dynamic Demand Model, Storable Goods, Soda Tax

JEL Classification: I18, H6, C15

Suggested Citation

Wang, Emily Yucai, The Impact of Soda Taxes on Consumer Welfare: Implications of Storability and Taste Heterogeneity (November 26, 2014). RAND Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2591866

Emily Yucai Wang (Contact Author)

University of Massachusetts, Amherst ( email )

80 Campus Center Way
University of Massachusetts, Amherst
Amherst, MA 01003
United States
4135455741 (Phone)

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