Optimal Fuel Taxation With Suboptimal Health Choices

67 Pages Posted: 2 Dec 2020

See all articles by Simona Sulikova

Simona Sulikova

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School

Inge van den Bijgaart

University of Gothenburg - Department of Economics

David Klenert

European Commission-Joint Research Centre

Linus Mattauch

University of Oxford

Date Written: October 15, 2020

Abstract

Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.

Keywords: Transport Externalities, Congestion, Active travel, Fuel, Health Behaviour, Optimal Taxation

JEL Classification: H23, I12, Q53, Q54, Q58, R41, R48, Z28

Suggested Citation

Sulikova, Simona and van den Bijgaart, Inge and Klenert, David and Mattauch, Linus, Optimal Fuel Taxation With Suboptimal Health Choices (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3712557 or http://dx.doi.org/10.2139/ssrn.3712557

Simona Sulikova (Contact Author)

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

Inge Van den Bijgaart

University of Gothenburg - Department of Economics ( email )

Sweden

David Klenert

European Commission-Joint Research Centre ( email )

Joint Research Centre, European Commission, Rue du
Brussels, Brussels 1050
Belgium

Linus Mattauch

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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