Optimal tax rules for addictive consumption

This paper studies implementation of the social optimum in a model of habit formation. We consider taxes that address inefciencies due to negative consumption externalities, imperfect competition, and self-control problems. Our contributions are to: i) account for producers market power; and ii) require implementation to be robust and time consistent. Together, these features can imply signifcantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples. dynamic externalities, internalities, addiction, optimal taxation, time consistent implementation