Optimal policy design for the sugar tax

TL;DR

This paper develops a mathematical framework to determine the optimal sugar tax rate that maximizes social welfare by modeling the interactions between government, producers, and consumers in a three-level game.

Contribution

It introduces a tractable, three-level optimization model for setting sugar taxes considering market dynamics and consumer preferences, applicable to markets with few product types.

Findings

The model can be solved efficiently for markets with limited product varieties.

Application to real data demonstrates practical utility and policy insights.

Optimal tax rates significantly influence consumer choices and social welfare.

Abstract

Healthy nutrition promotions and regulations have long been regarded as a tool for increasing social welfare. One of the avenues taken in the past decade is sugar consumption regulation by introducing a sugar tax. Such a tax increases the price of extensive sugar containment in products such as soft drinks. In this article we consider a typical problem of optimal regulatory policy design, where the task is to determine the sugar tax rate maximizing the social welfare. We model the problem as a sequential game represented by the three-level mathematical program. On the upper level, the government decides upon the tax rate. On the middle level, producers decide on the product pricing. On the lower level, consumers decide upon their preferences towards the products. While the general problem is computationally intractable, the problem with a few product types is polynomially solvable, even for an arbitrary number of heterogeneous consumers. This paper presents a simple, intuitive and easily implementable framework for computing optimal sugar tax in a market with a few products. This resembles the reality as the soft drinks, for instance, are typically categorized in either regular or no-sugar drinks, e.g. Coca-Cola and Coca-Cola Zero. We illustrate the algorithm using an example based on the real data and draw conclusions for a specific local market.