Essays on Public Economics

Summary This thesis consists of three essays in public economics. They study public intervention in markets where there are health-harming goods. The first chapter considers a situation where consumers can acquire two types of goods, each harmful to health but differing in their observability by the government (taxable or not). First, considering homogeneous individuals, the optimal taxes for these taxable and non-taxable harmful goods are calculated. Then, when the observability of consumption is limited, it is shown that the second optimal taxation rule depends on the degree of complementarity or substitutability between the two goods, observable and unobservable. Finally, redistributive issues are analyzed by considering on the one hand wealth inequalities and on the other hand differences in the perception of the damage caused by the consumption of harmful goods. Policy recommendations are proposed by considering physical inactivity and illegal drugs as harmful goods that cannot be taxed, and alcohol, tobacco and fatty and sugary products as harmful goods that can be. The second chapter focuses on the optimal policies for legalizing cannabis. Consumers differ in the utility they derive from the use of THC, the psychoactive component of cannabis, and have a misperception of the harm to their health from its use. The problem is analyzed using a vertical differentiation model where two firms, one public and one black market, compete on price and quality (THC content). A paternalistic government would like to correct, on the one hand, the excess of consumption linked to the bad perception of consumers of the damage caused by cannabis and, on the other hand, to reduce the size of the black market. We show that it is the desire to reduce the profits of the black market, rather than the lack of consumer perception, that explains why the optimal first-order consumption is not attainable in a decentralized market. We find two possible equilibria, where the public firm serves only those consumers with the highest or lowest propensity to pay for (cannabis) quality. Allowing the public firm to act first does not provide any benefit to the public firm and therefore does not improve social welfare. The third chapter analyzes how the policy of a neighboring jurisdiction, with the same characteristics as the domestic jurisdiction, affects the optimal domestic drug policy. Competition in the drug market is assumed to be imperfect, a black market is present, and consumers may make cross-border purchases. We consider that a drug policy consists of a choice between legalization and prohibition of drug sales on the one hand, and the intensity of investments to fight illegal production on the other. We assume that both drug use and black market profits have a negative social value. In equilibrium, if concern for drug use is low (high), then both jurisdictions adopt a policy of drug legalization (prohibition). More interestingly, for intermediate levels of the social value of drug use, the equilibria are asymmetric, which could explain, for example, why two symmetric jurisdictions adopt opposite policies in the fight against drugs. Moreover, in some circumstances, governments face a prisoner's dilemma. In the equilibrium, both jurisdictions legalize the sale of harmful drugs even though maintaining two prohibition policies would be socially preferable.