Externalities, Border Trade and Illegal Production: An Optimal Tax Approach to Alcohol Policy
AbstractThis paper deals with optimal income and commodity taxation in an economy, where alcohol is an externality-generating consumption good. In our model, alcohol can be bought domestically, imported (via border trade) or produced illegally. Border trade implies an incentive to set the domestic alcohol tax below the marginal social damage of alcohol, and to tax (subsidize) commodities which are complementary with (substitutable for) alcohol. In addition, since leisure and alcohol consumption are generally nonseparable, the income tax will also be used as a corrective instrument. On the other hand, the desire to reduce the illegal production may generally affect the optimal income and commodity taxes in either direction. One possible (and arguably realistic) outcome is, nevertheless, that the desire to avoid the illegal production works to reduce both the alcohol tax and the marginal income tax rate.
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Bibliographic InfoPaper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 654.
Length: 25 pages
Date of creation: 04 Apr 2005
Date of revision:
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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
More information through EDIRC
taxation; external effects; alcohol; border trade.;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-INT-2005-04-16 (International Trade)
- NEP-PBE-2005-04-16 (Public Economics)
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