Cigarette smoking and market failure: A determination of the economically efficient cigarette tax rate
Abstract
A framework for the optimal taxation of cigarettes based on economic efficiency is provided here. Fundamentally different views of smoking in the context of addictive behavior result in markedly different estimates of the efficient cigarette tax rate. Based on the rational addiction model, more than half of the states may have increased their cigarette excise tax rates to levels beyond the economically efficient point. But if many smokers have time-inconsistent preferences, cigarette tax rates well beyond $1 per pack may be justified.
