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

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).