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Measuring Consumption Externalities

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  • E. Randon

Abstract

Estimation and measurement of consumption externalities are still challenging problems in applied research. In this paper, externalities as Nash equilibrium are estimated using consumer demand theory and a large data set. We estimate Nash equilibrium consumption externalities in petrol budget shares of households living in a metropolitan area in UK. The reaction curves are derived from an Almost Ideal Demand System (AIDS) with externalities. A continuous set of ten year cross sections from the Family Expenditure Surveys is used. In each year, income decile cohorts are created. Results of 2SLS with Panel Data are presented after 2SLS estimates with pooling cross sections have been discussed. Results give evidence that the household petrol consumption pattern is explained by income and externality variables. We also suggest that in order to internalise the negative externality effect, households should be taxed independently of household income.

Suggested Citation

  • E. Randon, 2012. "Measuring Consumption Externalities," Working Papers wp840, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:wp840
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    References listed on IDEAS

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    1. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    2. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, number 9780521477185.
    3. William D. Schulze & Ralph C. d'Arge & David S. Brookshire, 1981. "Valuing Environmental Commodities: Some Recent Experiments," Land Economics, University of Wisconsin Press, vol. 57(2), pages 151-172.
    4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, January.
    5. Kahneman, Daniel & Knetsch, Jack L., 1992. "Valuing public goods: The purchase of moral satisfaction," Journal of Environmental Economics and Management, Elsevier, vol. 22(1), pages 57-70, January.
    6. Banks, James & Blundell, Richard & Lewbel, Arthur, 1996. "Tax Reform and Welfare Measurement: Do We Need Demand System Estimation?," Economic Journal, Royal Economic Society, vol. 106(438), pages 1227-1241, September.
    7. Hausman, J. A. & Newey, W. K. & Powell, J. L., 1995. "Nonlinear errors in variables Estimation of some Engel curves," Journal of Econometrics, Elsevier, vol. 65(1), pages 205-233, January.
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    More about this item

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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