The deadweight gain of insurance taxation when risky activities are optional

Some risky activities are optional, for example motoring. Participation in them is most attractive for good risks, creating a tendency for advantageous selection in the associated insurance market. Taxing insurance consequently yields deadweight gains when type is hidden. Results are strengthened if optimism is present. Finally, endogenising participation implies that the standard “positive correlation” test for the presence of policy relevant asymmetric information may fail.