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Is utility additive? The case of alcohol

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  • Kenneth Clements
  • Wana Yang
  • Simon Zheng

Abstract

The hypothesis of additive utility (or preference independence) is often applied to the demand for broad aggregates. Recent testing provides some evidence favourable to the hypothesis, thus overturning the older results based on the standard asymptotic tests which are seriously biased against the null in small samples. Using data for seven countries and a variety of tests, this paper shows that preference independence also cannot be rejected for more narrowly defined commodities - beer, wine and spirits. The implications of the results for efficient taxation of alcoholic beverages are also explored.

Suggested Citation

  • Kenneth Clements & Wana Yang & Simon Zheng, 1997. "Is utility additive? The case of alcohol," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1163-1167.
  • Handle: RePEc:taf:applec:v:29:y:1997:i:9:p:1163-1167
    DOI: 10.1080/00036849700000007
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    References listed on IDEAS

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    1. Selvanathan, Saroja, 1987. "A Monte Carlo test of preference independence," Economics Letters, Elsevier, vol. 25(3), pages 259-261.
    2. E. A. Selvanathan, 1991. "Further Results on Aggregation of Differential Demand Equations," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 799-805.
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    Citations

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    Cited by:

    1. Kenneth W. Clements & Xueyan Zhao, 2005. "Economic Aspects of Marijuana," Economics Discussion / Working Papers 05-28, The University of Western Australia, Department of Economics.
    2. Sijbren Cnossen, 2006. "Alcohol Taxation and Regulation in the European Union," CESifo Working Paper Series 1821, CESifo Group Munich.
    3. Dyack, Brenda & Goddard, Ellen W., 2001. "The Rise of Red and the Wane of White: Wine Demand in Ontario Canada," 2001 Conference (45th), January 23-25, 2001, Adelaide 125617, Australian Agricultural and Resource Economics Society.
    4. Vladimir Kühl Teles & Ronaldo A. Arraes, 2004. "Environmental Protection And Economic Growth," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32nd Brazilian Economics Meeting] 044, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Cook, Philip J. & Moore, Michael J., 2000. "Alcohol," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 30, pages 1629-1673 Elsevier.
    6. Clements, Kenneth W., 2008. "Price elasticities of demand are minus one-half," Economics Letters, Elsevier, vol. 99(3), pages 490-493, June.
    7. Saroja Selvanathan & E. A. Selvanathan, 2005. "Is utility additive? Further evidence," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 83-86.
    8. Parry Ian W. H. & West Sarah E & Laxminarayan Ramanan, 2009. "Fiscal and Externality Rationales for Alcohol Policies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-48, July.
    9. Jeffrey D. Kubik & John R. Moran, 2001. "Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes," Center for Policy Research Working Papers 39, Center for Policy Research, Maxwell School, Syracuse University.
    10. Clements, Kenneth W., 2004. "Three facts about marijuana prices," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), June.
    11. Rajaraman, Indira, 2007. "Impact of liquor taxation on consumption patterns in India," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 195-207.
    12. E. A. Selvanathan & S. Selvanathan, 2004. "Economic and demographic factors in Australian alcohol demand," Applied Economics, Taylor & Francis Journals, vol. 36(21), pages 2405-2417.
    13. Benjamin Volland, 2013. "The History of an Inferior Good: Beer Consumption in Germany," Papers on Economics and Evolution 2012-19, Philipps University Marburg, Department of Geography.
    14. Rijo M John, 2005. "Price Elasticity Estimates for Tobacco and Other Addictive Goods in India," Microeconomics Working Papers 22395, East Asian Bureau of Economic Research.
    15. Nelson, Jon P., 2014. "Estimating the price elasticity of beer: Meta-analysis of data with heterogeneity, dependence, and publication bias," Journal of Health Economics, Elsevier, vol. 33(C), pages 180-187.
    16. Parry, Ian W.H. & Laxminarayan, Ramanan & West, Sarah E., 2006. "Fiscal and Externality Rationales for Alcohol Taxes," Discussion Papers dp-06-51, Resources For the Future.
    17. Maier, Tomas, 2012. "Modelling Brewing Industry Pricing," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 4(4), December.
    18. Philip J. Cook & Jan Ostermann & Frank A. Sloan, 2005. "Are Alcohol Excise Taxes Good For Us? Short and Long-Term Effects on Mortality Rates," NBER Working Papers 11138, National Bureau of Economic Research, Inc.
    19. Ramful, Preety & Zhao, Xueyan, 2006. "Heterogeneity in Alcohol Consumption: The Case of Beer, Wine and Spirits in Australia," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25359, International Association of Agricultural Economists.
    20. Yana Roshchina, 2013. "To drink or not to drink: the microeconomic analysis of alcohol consumption in Russia in 2006-2010," HSE Working papers WP BRP 20/SOC/2013, National Research University Higher School of Economics.
    21. K.W. Clements & M. Daryal, 1999. "The Economics of Marijuana Consumption," Economics Discussion / Working Papers 99-20, The University of Western Australia, Department of Economics.
    22. Fleissig, Adrian R. & Whitney, Gerald A., 2007. "Testing additive separability," Economics Letters, Elsevier, vol. 96(2), pages 215-220, August.
    23. French, Michael Thomas & BrownTaylor, Didra & Bluthenthal, Ricky Neville, 2006. "Price elasticity of demand for malt liquor beer: Findings from a US pilot study," Social Science & Medicine, Elsevier, vol. 62(9), pages 2101-2111, May.
    24. Fogarty, James Joseph & Jakeman, Guy, 2011. "Wine tax reform: The impact of introducing a volumetric excise tax for wine," Working Papers 108667, University of Western Australia, School of Agricultural and Resource Economics.
    25. Y. Qiang, 1999. "An Economy-wide Model of Western Australia: The theoretical structure," Economics Discussion / Working Papers 99-06, The University of Western Australia, Department of Economics.

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