An alternative way to model merit good arguments

Abstract

Besley (1988) uses a scaling approach to model merit good arguments in commodity tax policy. In this paper, I question this approach on the grounds that it produces 'wrong' recommendations-taxation (subsidisation) of merit (demerit) goods-whenever the demand for the (de)merit good is inelastic. I propose an alternative approach that does not suffer from this deficiency, and derive the ensuing first and second best tax rules, as well as the marginal cost expressions to perform tax reform analysis.JEL code: H21

Optimal redistributive taxation when government's and agents' preferences differ

“…The general formulation of the government's problem that we presented in Section 2 covers as special cases the models considered by Racionero (2001) and Schroyen (2005) in their analyses of an economy with merit goods. Both authors want to capture the notion of a merit good by using an explicit functional form from which it can be immediately detected which good is the merit/demerit good.…”

“…Besley (1988) proposed a 1 formulation that was meant to capture the merit good aspect in a simple way. However, as shown by Schroyen (2005), the Besley formulation is ambiguous. Schroyen (2005) and Racionero (2001) provide still other ways to try and capture the notion of a merit good in terms of a property of a direct utility function.…”

“…However, as shown by Schroyen (2005), the Besley formulation is ambiguous. Schroyen (2005) and Racionero (2001) provide still other ways to try and capture the notion of a merit good in terms of a property of a direct utility function. We will consider both in the paper.…”

Operational expressions for the marginal cost of indirect taxation when merit arguments matter

“…Such arguments are called merit good arguments, and economists have traced out the implications for optimal commodity tax rules. I refer here to an article by Besley (1988) and myself (Schroyen, 2004).…”

“…In particular, I show how the central expressions for that analysis-the marginal welfare cost of rasing an extra Euro by means of the indirect tax rate on good i-need to be amended to allow for merit good arguments and how these expressions can be parameterised in terms of aggregate demand elasticities. To model merit goods arguments, I choose the numéraire function approach proposed in Schroyen (2004) (where I also explain why Besley's approach is flawed). But since I want to arrive at decision rules that are easily implementable in practise, I will make use of the distance function rather than the numéraire function to model the preferences of the government.…”