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Commodity Taxation as Insurance Against Price Risk

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Author Info
Simon Cowan

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Abstract

The paper shows how commodity taxes can provide insurance to consumers when the producer price is volatile. Specific and ad valorem taxes have differing roles. The optimal specific tax is positive when demand has some elasticity. The optimal ad valorem rate is zero when demand is unit-elastic, negative when demand is inelastic and positive for elastic demand. When both types of taxes are used in general the specific tax is positive and the ad valorem rate is negative. The model also applies to the problem in public utility regulation of determining how retail prices should move with wholesale or fuel prices.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 110.

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Date of creation: 2002
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Handle: RePEc:oxf:wpaper:110

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Related research
Keywords: commodity taxation; price regulation;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

References listed on IDEAS
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  1. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February. [Downloadable!] (restricted)
  2. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can'T Borrow: A New Perspective On The Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 269-296, February. [Downloadable!] (restricted)
    Other versions:
  3. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-52, January. [Downloadable!] (restricted)
  4. Cowan, Simon, 2004. "Optimal risk allocation for regulated monopolies and consumers," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 285-303, January. [Downloadable!] (restricted)
  5. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December. [Downloadable!] (restricted)
    Other versions:
  6. Paola Giuliano & Stephen Turnovsky, 2000. "Intertemporal Substitution, Risk Aversion, and Economic Performance in a Stochastically Growing Open Economy," Discussion Papers in Economics at the University of Washington 0002, Department of Economics at the University of Washington. [Downloadable!]
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  7. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February. [Downloadable!]
  8. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer, vol. 3(1), pages 29-44, January. [Downloadable!] (restricted)
  9. Besley, Timothy J., 1988. "Optimal reimbursement health insurance and the theory of Ramsey taxation," Journal of Health Economics, Elsevier, vol. 7(4), pages 321-336, December. [Downloadable!] (restricted)
  10. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October. [Downloadable!] (restricted)
  11. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August. [Downloadable!] (restricted)
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