On Optimal Taxation and Subsidization of Health Goods
In the current US health insurance system in which the households directly sponsor small part (10%) of the high health care cost they incur (17.7% of GDP), optimal taxation and subsidization on health goods show large scope for welfare improvement. If households do not fully pay for the medical expenditure, they generate externalities by not internalizing the full effects of their own health behaviors on medical expenditure and, in turn, on health insurance premiums or tax burdens for governmental health care subsidies. Using an overlapping generations framework of working age that models these externalities, this paper compares the welfare effects of optimal taxation of alcohol and cigarette to those of optimal subsidization of complementary goods to physical activity. Nation-wide sports goods subsidization policies, as opposed to the extant health excise taxes on alcohol and cigarette, have received less attention despite the numerous evidences of their potentials to internalize the externalities. The welfare gain from optimal subsidization of sports goods, however, is $146.08 per household every year, about 16 times higher than that from optimal taxation on alcohol and cigarette. The former decreases the aggregate medical expenditure by 3.2%, while the latter only by 0.2%.
Macroeconomics, Health Economics, Public Economics