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The Signaling Effect of Environmental and Health-Based Taxation and Legislation for Public Policy: An Empirical Analysis

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Abstract

The main objective of this article is to examine how taxes affect consumption of commodities that are detrimental to health and the environment: tobacco, alcoholic beverages, household energy and petroleum fuel (petrol) for transportation. Specifically, we examine if a tax increase leads to a significantly larger change in consumption than a producer price change, which is referred to as the signaling effect from taxation. This objective is achieved through an empirical analysis using the Linear Almost Ideal Demand System. The analysis uses aggregated cross sectional time series data and information on major legislation introductions in Sweden, Denmark and the United Kingdom from 1970 to 2009. We find the main result to be that the signaling effect is significant for “Alcoholic Beverages” and “Electricity” in Sweden, “Electricity” in Denmark and “Electricity and Gas” and “Electricity” the United Kingdom. This implies that tax policy is more effective in tackling consumption of commodities which produce negative public effects (negative externalities affecting the social good such as pollution) than those for negative private effects (negative externalities affecting the private good such as health).

Suggested Citation

  • Brockwell, Erik, 2013. "The Signaling Effect of Environmental and Health-Based Taxation and Legislation for Public Policy: An Empirical Analysis," CERE Working Papers 2013:3, CERE - the Center for Environmental and Resource Economics.
  • Handle: RePEc:hhs:slucer:2013_003
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    1. Fare, R. & Grosskopf, S. & Pasurka, C., 1986. "Effects on relative efficiency in electric power generation due to environmental controls," Resources and Energy, Elsevier, pages 167-184.
    2. Fare, Rolf & Grosskopf, Shawna & Kokkelenberg, Edward C, 1989. "Measuring Plant Capacity, Utilization and Technical Change: A Nonparametric Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 655-666, August.
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    More about this item

    Keywords

    environmental taxation; health-based taxation; public policy;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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