The Economics of Public Policy and Endogenous Health

Abstract

In this thesis, we explore the relationship between public policy and endogenous health in the economy from three aspects.

First, we explore the health effects underlying the implementation of taxes. Taxes on unhealthy commodities may fail in promoting health because the beneficial effects of reducing unhealthy consumption could be offset by the simultaneous decrease in health investment. However, when coupled with the revenue-neutral tax reforms where income taxes are adjusted, taxes on unhealthy commodities can improve both health and welfare more effectively.

Second, we take a non-paternalistic view to justify the role of sin taxes in terms of fiscal externalities. Although the Pigouvian element in optimal sin taxes decreases in the second-best setting, optimal sin taxes are not necessarily lower due to the presence of the efficiency element. Our calibration on the UK economy shows that the implementation of sin taxes have double-dividends which improve not only health but also economic performance as well as welfare.

Third, we explore the relationship between labor supply and public policy. Old-age labor supply increases with higher spending on health unless the additional spending is funded through taxes on old-age labor income. The economic impacts of changes in technologies are also examined. Furthermore, we find that the optimal tax scheme is determined by the coefficients of relative risk aversion.