Sin Taxes: Good, Better, Best.

• Author: Allcott, Hunt

Economists have long recognized that when consuming a good produces externalities, welfare can be raised by imposing corrective taxes. More recently, there has been a growing belief that some goods should be taxed because of internalities--harms that people might impose on themselves due to limited attention, misunderstanding of financial instruments, systematically biased beliefs about themselves such as overconfidence, or lapses of self-control. One of the agendas that we have pursued at the intersection of public economics and behavioral economics

There are several domains where economists and policymakers worry about both externalities and internali-is the optimal design of corrective taxes and subsidies to mitigate both externalities and internalities. Relative to externalities, internalities have received much less attention from economists, but they have been a key focus of our work--and, quantitatively, we have found that they are as significant as externalities. Taxes addressing externalities and internalities are sometimes referred to colloquially as "sin taxes." ties. One concerns goods that are ostensibly harmful to health, such as cigarettes, alcohol, and sugary drinks. The externalities include burdens on the health system, and the internalities may range from incorrect beliefs about harmful health effects to lapses of self-control. Another domain concerns appliances or automobiles that vary in energy or fuel efficiency. Purchasing less-efficient goods increases environmental externalities and may also harm consumers themselves if they misperceive or are inattentive to the energy or fuel costs.

Hunt Allcott is a research associate affiliated with the NBER's Public Economics, Industrial Organization, and Environmental and Energy Economics Programs.He is a professor of global environmental policy at Stanford University, a codirector of the Stanford Environmental and Energy Policy Analysis Center, an affiliate of ideas42 and the Abdul Latif Jameel Poverty Action Lab (J-PAL), and a member of the board of editors of American Economic Journal: Economic Policy.

Allcott received his BS and MS in engineering from Stanford in 2002 and his PhD in public policy from Harvard University in 2009. He grew up in Oregon and now lives in Palo Alto, California with his wife.

Benjamin Lockwood is a faculty research fellow in the NBER's Public Economics Program. He is the Clarence Nickman Assistant Professor of Business Economics and Public Policy at the University of Pennsylvania's Wharton School.

Lockwood's research focuses on optimal taxation and regulation in settings where policymakers are concerned about reducing inequality and changing behavior. He received his BA in philosophy and economics from Amherst College in 2008 and his PhD in economics from Harvard University in 2016.

Lockwood grew up in Idaho and now lives in Pennsylvania with his wife and three children.

Dmitry Taubinsky is a research associate affiliated with the NBER's Public Economics Program and an associate professor of economics at the University of California, Berkeley. He received his BA in applied mathematics in 2009 and his PhD in economics in 2014, both from Harvard University.

Using a combination of theory, field experiments, surveys, and quasi-experiments, Taubinsky studies topics such as inattention to and misunderstanding of complex tax incentives, "sin taxes" on goods such as sugary drinks, consumer-facing energy policy, and regulation welfare effects of non-standard policy levers such as information labels, social recognition and financial decision-making by low-income populations such as payday-loan borrowers.

Taubinsky grew up in...