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The Demand for Vice: Inter-Commodity Interactions with Uncertainty

  • Kenneth W Clements

    (UWA Business School, The University of Western Australia)

  • Yihui Lan

    ()

    (UWA Business School, The University of Western Australia)

  • Xueyan Zhao

    (Department of Econometrics and Business Statistics, Monash University)

This paper analyses consumption patterns of vice -- marijuana, tobacco and alcohol. To deal with imperfect marijuana data, we exploit the interdependencies in the consumption of the three drugs identified in prior research, and introduce a Monte Carlo simulation procedure to formally account for the inherent uncertainty in marijuana-related data and parameters. To illustrate the application of the framework, we use Australian data to 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 for marijuana of about 50% is estimated to yield additional revenue of about 15% of the pre-existing proceeds from vice taxation. The role of uncertainty surrounding marijuana is highlighted by providing the entire probability distributions of all endogenous variables in a consistent multivariate framework.

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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 06-30.

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Length: 36 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:uwa:wpaper:06-30
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  1. Xueyan Zhao & Mark N. Harris, 2004. "Demand for Marijuana, Alcohol and Tobacco: Participation, Levels of Consumption and Cross-equation Correlations," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 394-410, December.
  2. Cameron, Lisa & Williams, Jenny, 2001. "Cannabis, Alcohol and Cigarettes: Substitutes or Complements?," The Economic Record, The Economic Society of Australia, vol. 77(236), pages 19-34, March.
  3. Jeffrey A. Miron, 1997. "The Effects of Alcohol Prohibition on Alcohol Consumption," Papers 0078, Boston University - Industry Studies Programme.
  4. Kenneth W. Clements, 2004. "Three facts about marijuana prices ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), pages 271-300, 06.
  5. Izan, Haji Y. & Clements, Kenneth W., 1979. "A cross-cross-section analysis of consumption patterns," Economics Letters, Elsevier, vol. 4(1), pages 83-86.
  6. Frank J. Chaloupka & Kenneth E. Warner, 1999. "The Economics of Smoking," NBER Working Papers 7047, National Bureau of Economic Research, Inc.
  7. Zhao, Xueyan & Griffiths, William E. & Griffith, Garry R. & Mullen, John D., 2000. "Probability distributions for economic surplus changes: the case of technical change in the Australian wool industry," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 44(1), March.
  8. Griffiths, William E. & Zhao, Xueyan, 1999. "A Unified Approach To Sensitivity Analysis In Equilibrium Displacement Models: Comment," Working Papers 12950, University of New England, School of Economics.
  9. Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-84, December.
  10. Craig A. Gallet & John A. List, 2003. "Cigarette demand: a meta-analysis of elasticities," Health Economics, John Wiley & Sons, Ltd., vol. 12(10), pages 821-835.
  11. Jones, Andrew M, 1989. "A Systems Approach to the Demand for Alcohol and Tobacco," Bulletin of Economic Research, Wiley Blackwell, vol. 41(2), pages 85-105, April.
  12. Brown, Alan & Deaton, Angus S, 1972. "Surveys in Applied Economics: Models of Consumer Behaviour," Economic Journal, Royal Economic Society, vol. 82(328), pages 1145-1236, December.
  13. Jeffrey A. Miron, 2003. "The Effect of Drug Prohibition on Drug Prices: Evidence from the Markets for Cocaine and Heroin," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 522-530, August.
  14. Saffer, Henry & Chaloupka, Frank, 1999. "The Demand for Illicit Drugs," Economic Inquiry, Western Economic Association International, vol. 37(3), pages 401-11, July.
  15. Henry Saffer & Frank J. Chaloupka, 1999. "Demographic Differentials in the Demand for Alcohol and Illicit Drugs," NBER Chapters, in: The Economic Analysis of Substance Use and Abuse: An Integration of Econometrics and Behavioral Economic Research, pages 187-212 National Bureau of Economic Research, Inc.
  16. Jenny Williams & Parvin Mahmoudi, 2004. "Economic Relationship Between Alcohol and Cannabis Revisited," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 36-48, 03.
  17. 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.
  18. Bewley, R. & Fiebig, D.G., 1989. "Why Are Long-Run Parameter Estimates So Disparate?," Papers 89-3, New South Wales - School of Economics.
  19. Clements, Kenneth W. & Selvanathan, Saroja, 1991. "The Economic Determinants Of Alcohol Consumption," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 35(02), August.
  20. Clements, Kenneth W & Johnson, Lester W, 1983. "The Demand for Beer, Wine, and Spirits: A Systemwide Analysis," The Journal of Business, University of Chicago Press, vol. 56(3), pages 273-304, July.
  21. Pacula, Rosalie Liccardo, 1998. "Does increasing the beer tax reduce marijuana consumption?," Journal of Health Economics, Elsevier, vol. 17(5), pages 557-585, October.
  22. repec:sae:niesru:v:167:y::i:1:p:106-112 is not listed on IDEAS
  23. Duffy, Martyn, 1991. "Advertising and the Consumption of Tobacco and Alcoholic Drink: A System-Wide Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(4), pages 369-85, November.
  24. repec:cup:cbooks:9780521884952 is not listed on IDEAS
  25. Clements, Kenneth W & Selvanathan, Antony & Selvanathan, Saroja, 1996. "Applied Demand Analysis: A Survey," The Economic Record, The Economic Society of Australia, vol. 72(216), pages 63-81, March.
  26. Frank J. Chaloupka & Rosalie Liccardo Pacula & Matthew C. Farrelly & Lloyd D. Johnston & Patrick M. O'Malley, 1999. "Do Higher Cigarette Prices Encourage Youth to Use Marijuana?," NBER Working Papers 6939, National Bureau of Economic Research, Inc.
  27. Matthew C. Farrelly & Jeremy W. Bray & Gary A. Zarkin & Brett W. Wendling & Rosalie Liccardo Pacula, 1999. "The Effects of Prices and Policies on the Demand for Marijuana: Evidence from the National Household Surveys on Drug Abuse," NBER Working Papers 6940, National Bureau of Economic Research, Inc.
  28. Sandra L. Decker & Amy Ellen Schwartz, 2000. "Cigarettes and Alcohol: Substitutes or Complements?," NBER Working Papers 7535, National Bureau of Economic Research, Inc.
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