Tuesday, 14 February 2012

Optimal tax theory - contraception edition

Tyler points to some data on the price elasticity of demand for the Pill as contraception among college-aged American women. A price increase from $5-$10 per month to $30-$50 per month resulted in a 2 - 4 percent drop in use of the Pill. The paper says the price increase was "more than three-fold". If a 300% increase in the price of the Pill results in a 3% drop in demand, that's about the lowest price elasticity of demand I've ever seen - around 0.01.

Oh, the fun tax theory exam questions that could flow from this! Recall that the naive interpretation of Ramsey tax theory says that you want to tax more heavily those goods that are inelastic in demand: that way, deadweight costs are lower. But the more accurate interpretation of Ramsey (here too) is that you want to tax more heavily those goods that are complements to untaxed leisure in a world in which we can't tax leisure directly. Further, we have Pigovean reasons for taxing public bads and subsidizing public goods.

So, is the Pill a complement to leisure or to labour? Tyler points to some evidence from the paper's abstract:
Women who lack insurance and have sex infrequently appear to substitute toward emergency contraception; uninsured women who are frequent sex participants appear to substitute toward non-prescription forms of birth control. Additionally, we find small but significant decreases in frequency of intercourse and the number of sex partners, suggesting that some women may be substituting away from sexual behavior in general.
If intercourse is leisure rather than investment in work-related social capital, then we might have some Ramsey argument for taxing contraception. But it's not immediately clear in which direction any Pigovean argument might run. Neither is it even immediately clear in which direction any long-run Ramsey argument might run if you think through some general equilibrium arguments about sex, positional goods, and hypergamy; easy to imagine how it could go either way.

There's at least a short essay exam question in there on tax theory for anybody who's lecturing tax in public economics next year; it's a nice one where there are lots of clearly wrong answers but also many potentially right answers so long as the argument is reasonable.

Happy Valentine's Day!


  1. And what about lowered ovarian cancer risks due to the pill, along with it's use as an acne treatment?

  2. Neither of those are particularly relevant for optimal tax theory, except perhaps if you want to worry about offsetting losses to the public health system from greater ovarian cancer.

  3. The Pill, as contraception, is clearly a substitute for labour (and childbirth).

  4. You see ~3% decrease for the whole population. But people with health insurance don't pay the full cost for drugs anyway. So you see a substitution from campus clinics (where the price increased) to private insurers (where the price didn't), with a smaller effect on overall quantity. "For college women who lacked health insurance...the decline was two to three times as large." That is still pretty inelastic, though even there the paper points out there were still ways (albeit more limited ones) to continue to obtain pills at the lower price. See page 15 of the paper.

    Of course, if all you care about is if it's a complement to leisure, that's less relevant.

    1. They are able to control for that by looking at effects among uninsured women, where the drop was 2.0 to 3.6 percentage points. Still very inelastic relative to other goods.