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

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 imposing a soda excise tax. In this paper, we apply the Becker-Murphy model of rational addiction to present evidence that consumers are rationally addicted to the consumption of soda drinks that contain caffeine and/or sugar. 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. We extend the canonical rational addiction model by introducing a multidimensional framework of addiction, which allows for the decomposition of addiction in the context of soda consumption into two distinct components: caffeine and sugar. Using the parameter estimates, we conduct counterfactual analyses based on realistic policy scenarios and evaluate how different tax policies would affect soda purchases. For example, one policy experiment indicates that a tax of one cent per ounce only on sugary soda categories would lead to a 50.2% decrease in sugary soda consumption. In addition, we find that sugar seems to play a bigger role in influencing substitution patterns than caffeine. We further investigate how these taxes affect welfare through a change in addiction level and emphasize the importance of addiction by comparing estimation results with and without addiction in the model. To understand the externalities associated with soda taxation, we integrate our counterfactual results with causal estimates from recent medical literature. Our findings suggest that individuals could decrease their medical costs by $642 to $717 per year under various tax schemes. These results underscore the potential of soda taxes to significantly improve public health and reduce obesity-related healthcare costs. This paper was accepted by Raphael Thomadsen, marketing. Funding: This work was supported by a Nanyang Technological University start-up grant [Grant 023220-00001]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.02422 .