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Commodity Taxation as Insurance Against Price Risk

Author

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  • Simon GB Cowan
  • Simon Cowan

Abstract

The paper shows how commodity taxes can provide insurance to consumers when the producer price is volatile. Specific and ad valorem taxes have differing roles. The optimal specific tax is positive when demand has some elasticity. The optimal ad valorem rate is zero when demand is unit-elastic, negative when demand is inelastic and positive for elastic demand. When both types of taxes are used in general the specific tax is positive and the ad valorem rate is negative. The model also applies to the problem in public utility regulation of determining how retail prices should move with wholesale or fuel prices.

Suggested Citation

  • Simon GB Cowan & Simon Cowan, 2002. "Commodity Taxation as Insurance Against Price Risk," Economics Series Working Papers 110, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:110
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper110.pdf
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    References listed on IDEAS

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    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
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    6. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October.
    7. Cowan, Simon, 2004. "Optimal risk allocation for regulated monopolies and consumers," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 285-303, January.
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    9. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, May.
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    11. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-152, January.
    12. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 29-44, January.
    13. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
    14. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.
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    More about this item

    Keywords

    commodity taxation; price regulation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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