Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 794: Optimal fuel taxation with suboptimal health choices

Simona Sulikova (), Inge van den Bijgaart (), David Klenert () and Linus Mattauch ()
Additional contact information
Simona Sulikova: University of Oxford
Inge van den Bijgaart: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
David Klenert: Joint Research Centre, European Commission,
Linus Mattauch: University of Oxford

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-codes: H23; I12; Q58

68 pages, October 2020

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