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The Demand for Vice: Inter-Commodity Interactions with Uncertainty

Author

Listed:
  • Kenneth W. Clements

    (Department of Economics, The University of Western Australia)

  • Yihui Lan

    (Department of Economics, The University of Western Australia)

  • Xueyan Zhao

    (Department of Econometrics and Business Statistics, Monash University)

Abstract

This paper introduces a simulation procedure in the context of a demand system for vice -- marijuana, tobacco and alcohol -- to formally account for the inherent uncertainty in marijuanarelated data and parameters. This entails using existing econometric estimates pertaining to the consumption of alcohol and tobacco, and the much more limited information on marijuana. As an illustrative application of the framework, we simulate the impact on the consumption of vice of a reduction in the price of marijuana; changes in pre-existing taxes on tobacco and alcohol; legalisation of marijuana, which is then subject to taxation; and a tax tradeoff involving the introduction of a revenue-neutral tax on marijuana that is offset by reduced alcohol taxation. The revenue-maximising tax rate of about 50 percent is estimated to yield additional revenue of about 15 percent of the pre-existing proceeds from vice taxation. The role of uncertainty surrounding preference interactions within vice, as well as the uncertainties regarding marijuana data, is highlighted by providing the whole distribution of each endogenous variable.

Suggested Citation

  • Kenneth W. Clements & Yihui Lan & Xueyan Zhao, 2005. "The Demand for Vice: Inter-Commodity Interactions with Uncertainty," Economics Discussion / Working Papers 05-30, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:05-30
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    References listed on IDEAS

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    Cited by:

    1. Kenneth W. Clements & Yihui Lan & Xueyan Zhao, 2005. "The Demand for Vice: Inter-Commodity Interactions with Uncertainty," Economics Discussion / Working Papers 05-30, The University of Western Australia, Department of Economics.
    2. George Verikios, 2004. "A Model of the World Wool Market," Economics Discussion / Working Papers 04-24, The University of Western Australia, Department of Economics.
    3. Kenneth W. Clements & Xueyan Zhao, 2005. "Economic Aspects of Marijuana," Economics Discussion / Working Papers 05-28, The University of Western Australia, Department of Economics.
    4. Verikios, George, 2009. "Modelling the world wool market: A hybrid approach," Economic Modelling, Elsevier, vol. 26(2), pages 418-431, March.
    5. Kenneth Clements & Yihui Lan & Xueyan Zhao, 2010. "The demand for marijuana, tobacco and alcohol: inter-commodity interactions with uncertainty," Empirical Economics, Springer, vol. 39(1), pages 203-239, August.
    6. George Verikios, 2006. "Understanding the World Wool Market: Trade, Productivity and Grower Incomes. Part 4: Model Data and Parameters," Economics Discussion / Working Papers 06-22, The University of Western Australia, Department of Economics.
    7. James Fogarty, 2004. "The Own-Price Elasticity of Alcohol: A Meta-Analysis," Economics Discussion / Working Papers 04-01, The University of Western Australia, Department of Economics.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • K0 - Law and Economics - - General
    • I0 - Health, Education, and Welfare - - General
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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