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Consumption Externalities and the Role of Government: The Case of Alcohol


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  • Felicity Barker

    (The Treasury)

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    This paper considers the role of government in the case of externalities and, in particular, in the case of alcohol externalities. The purpose of the paper is to assess whether the current level of the alcohol excise can be justified on externality grounds. The paper assesses various mechanisms to address externalities. These mechanisms are institutional solutions, trade in rights to generate externalities, regulatory measures and Pigouvian taxes. The paper assesses these tools in the case of alcohol and concludes that institutional, trade and regulatory solutions are limited in their ability to address the externalities of alcohol. A specific tax can be justified in the case of alcohol. The externalities are large and there is sufficient information on which to base a tax. Given the information constraints the specific tax must be applied uniformly across a rage of units of consumption, rather than to particular individuals. Where an optimal uniform tax is imposed it is reasonable to assume that the amount of revenue collected by the government would be at least as large as the total externality. In 1999/00 the amount of revenue collected from the tax on alcohol was $580 million. This is near the mid-point of the estimated bound of the external tangible costs of alcohol. Thus the current rate of excise tax can be justified on externality grounds.

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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 02/25.

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    Length: 27 pages
    Date of creation: Dec 2002
    Date of revision:
    Handle: RePEc:nzt:nztwps:02/25

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    Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
    Phone: +64-4-472 2733
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    Related research

    Keywords: Externalities; Alcohol; Coase theorem; Pigouvian tax;

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    1. Barrett, Garry F, 2002. "The Effect of Alcohol Consumption on Earnings," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 78(240), pages 79-96, March.
    2. Vivian Hamilton & Barton H. Hamilton, 1997. "Alcohol and Earnings: Does Drinking Yield a Wage Premium," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 30(1), pages 135-51, February.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Costs and benefits of alcohol, properly done
      by Crampton in Offsetting Behaviour on 2009-04-27 01:35:00
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    Cited by:
    1. John Creedy, 2004. "The Effects on New Zealand Households of an Increase in The Petrol Excise Tax," Treasury Working Paper Series, New Zealand Treasury 04/01, New Zealand Treasury.
    2. Creedy, John & Sleeman, Catherine, 2006. "Carbon taxation, prices and welfare in New Zealand," Ecological Economics, Elsevier, Elsevier, vol. 57(3), pages 333-345, May.
    3. Sijbren Cnossen, 2007. "Alcohol taxation and regulation in the European Union," International Tax and Public Finance, Springer, Springer, vol. 14(6), pages 699-732, December.
    4. John Creedy & Catherine Sleeman, 2005. "Excise Taxation in New Zealand," Department of Economics - Working Papers Series, The University of Melbourne 929, The University of Melbourne.


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