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Excise Taxation and Product Quality: The Gasoline Market

  • Todd M. Nesbit

    (Department of Economics, West Virginia University)

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    Following Barzel (1976), product quality increases in response to unit taxation but remains unchanged by ad valorem taxation. While many tax theorists agree this argument is theoretically sound, empirical support of Barzel’s theory is limited to the cigarette market. This paper tests and confirms his theory in the gasoline market, a market in which Barzel failed to find supporting evidence in his original article. Using a direct test proposed by Sobel and Garrett (1997) and improved data, I find the market shares of premium and mid-grade gasoline rise in response to per-unit taxation but are unaffected by advalorem taxation.

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    File URL: http://be.wvu.edu/phd_economics/pdf/05-11.pdf
    File Function: First version, 2005
    Download Restriction: no

    Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 05-11 Classification-.

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    Length: 21 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:wvu:wpaper:05-11
    Contact details of provider: Postal: P.O. Box 6025, Morgantown, WV 26506-6025
    Phone: (304) 293-7859
    Fax: (304) 293-2233
    Web page: http://be.wvu.edu/phd_economics/
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    1. Borcherding, Thomas E & Silberberg, Eugene, 1978. "Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 131-38, February.
    2. Leffler, Keith B, 1982. "Ambiguous Changes in Product Quality," American Economic Review, American Economic Association, vol. 72(5), pages 956-67, December.
    3. Kayser, Hilke A., 2000. "Gasoline demand and car choice: estimating gasoline demand using household information," Energy Economics, Elsevier, vol. 22(3), pages 331-348, June.
    4. Sobel, Russell S & Garrett, Thomas A, 1997. "Taxation and Product Quality: New Evidence from Generic Cigarettes," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 880-87, August.
    5. Bertonazzi, Eric P & Maloney, Michael T & McCormick, Robert E, 1993. "Some Evidence on the Alchian and Allen Theorem: The Third Law of Demand?," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 383-93, July.
    6. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-97, December.
    7. Archibald, Robert & Gillingham, Robert, 1980. "An Analysis of the Short-Run Consumer Demand for Gasoline Using Household Survey Data," The Review of Economics and Statistics, MIT Press, vol. 62(4), pages 622-28, November.
    8. Umbeck, John, 1980. "Shipping the Good Apples Out: Some Ambiguities in the Interpretation of "Fixed Charge"," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 199-208, February.
    9. Sumner, Michael T & Ward, Robert, 1981. "Tax Changes and Cigarette Prices [An Alternative Approach to the Analysis of Taxation]," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1261-65, December.
    10. Cowen, Tyler & Tabarrok, Alexander, 1995. "Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem," Economic Inquiry, Western Economic Association International, vol. 33(2), pages 253-56, April.
    11. Johnson, Terry R, 1978. "Additional Evidence on the Effects of Alternative Taxes on Cigarette Prices," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 325-28, April.
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