Optimal Policy with Correlated Interalities and Preferences: The Case of E-Cigarettes

A key rationale for taxing "risky" goods such as cigarettes is that individuals consume these goods more than what is both privately optimal. Examples of these ``internalities" include being uninformed about the health risks or having time inconsistent preferences. I study the correlation between internalities and and preferences in the context of tobacco products. The key point of my study is to quantify the extent to which cigarette smokers who misperceive the relative health risks of cigarettes and e-cigarettes, and thus exhibit potentially large internalities, are also more or less sensitive to changes in relative prices. After identifying these correlations, I will simulate the optimal cigarette and e-cigarette taxes. Unfortunately, large-scale nationally representative data sources that a.) have the power to identify small price and cross-price elasticities with precision and b.) ask about relative health risk perceptions do not exist. Thus, I will conduct a survey in which, in addition to risk perceptions, I will present respondents with randomized choice scenarios. The combination of these variables will allow me to identify the interaction effects between risk perceptions and substitution patterns.