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Taxing a Commodity With and Without Revenue Neutrality: An Exploration Using a Calibrated Theoretical Consumer Equilibrium Model


  • Frank T. Denton
  • Dean C. Mountain


It has long been recognized that taxing a commodity that generates negative externalities can be used to reduce the consumption of that commodity. A variant involves the imposition of revenue neutrality but that may alter the tax rate required to meet a consumption reduction target. We explore the relationships among the commodity tax rate, the demand and supply elasticities, and the revenue offsets by calibrating a theoretical consumer equilibrium model and then recalibrating it with alternative parameter configurations. For each configuration we simulate equilibrium for three policy scenarios: no neutrality, neutrality achieved by subsidizing other commodities, and neutrality achieved by income transfer.

Suggested Citation

  • Frank T. Denton & Dean C. Mountain, 2011. "Taxing a Commodity With and Without Revenue Neutrality: An Exploration Using a Calibrated Theoretical Consumer Equilibrium Model," Quantitative Studies in Economics and Population Research Reports 445, McMaster University.
  • Handle: RePEc:mcm:qseprr:445

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    References listed on IDEAS

    1. Nichele, Veronique & Robin, Jean-Marc, 1995. "Simulation of indirect tax reforms using pooled micro and macro French data," Journal of Public Economics, Elsevier, vol. 56(2), pages 225-244, February.
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    Consumer Market Equilibrium; Commodity Taxation; Revenue Neutrality;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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