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Taxing a Commodity with and without Revenue Neutrality: A Calibrated Theoretical Consumer Equilibrium Model

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  • Frank Denton
  • Dean Mountain

Abstract

It has long been recognized that taxing a commodity that generates negative externalities can be used to reduce its consumption. One way to do this is to impose revenue neutrality but that may alter the tax rate required to meet a consumption reduction target. We explore the relationships among the commodity tax rate, the demand and supply elasticities, and the revenue offsets by calibrating a theoretical consumer equilibrium model and then recalibrating it with alternative parameter configurations. For each configuration we simulate equilibrium for three policy scenarios: no neutrality, neutrality achieved by subsidizing other commodities, and neutrality achieved by income transfer. Copyright International Atlantic Economic Society 2011

Suggested Citation

  • Frank Denton & Dean Mountain, 2011. "Taxing a Commodity with and without Revenue Neutrality: A Calibrated Theoretical Consumer Equilibrium Model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 39(3), pages 261-271, September.
    • Handle: RePEc:kap:atlecj:v:39:y:2011:i:3:p:261-271
    DOI: 10.1007/s11293-011-9276-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumer market equilibrium; Commodity taxation; Revenue neutrality; H23; D11; D58;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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