Consumption Externalities and Imperfect Corrective Pricing

Diamond, Peter A.

doi:10.2307/3003052

Cited by 157 publications

(108 citation statements)

References 6 publications

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“…Perhaps this suggests that differences in external costs arise from differences between individuals rather than between units of alcohol consumed by a particular individual. This provides some support, as Diamond (1973) argues, for regarding the average external costs as a rough-and-ready indicator of the optimal externality duty. Admittedly, for harmful users of alcohol (almost 1 in 5 of all drinkers), the excise revenue collected will generally be less than the externalities they impose.…”

mentioning

confidence: 79%

Alcohol taxation and regulation in the European Union

Cnossen

2007

Int Tax Public Finance

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This article surveys alcohol consumption, taxation and regulation in the European Union (EU). It uses the estimates of cost-of-illness studies to gauge the external costs of harmful alcohol use. In all but one member state, the costs exceed alcohol excise duty collections. An optimal alcohol excise is difficult to design, because the welfare gains from a reduction in socially costly heavy drinking must be balanced against the welfare loss from a fall in moderate drinking. This suggests that while an alcohol excise increase may be efficiency improving, complementary regulatory measures, which focus on specific problem groups, should be an important element of the policy package. A case can also be made for reducing wasteful crossborder shopping by raising the minimum duties on wine, beer and spirits, preferably in line with their relative alcohol content.

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confidence: 79%

Alcohol taxation and regulation in the European Union

Cnossen

2007

Int Tax Public Finance

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“…Following Diamond (1973), a more general form of atmosphere-type externalities is given by the utility functions U = V = for some function y. As above, individuals are assumed not to perceive their influence on the level of 7, so that first-order conditions for their maximization problems are given by (40).…”

Section: (37)mentioning

confidence: 99%

“…An example with such a result is provided below. Diamond (1973) has a similar example where the direct policy fails, but he has not considered the possibility of indirect policies. We also list a number of cases in which the traditional prescription is confirmed and the overall optimum involves only direct pohcies.…”

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confidence: 99%

Direct versus Indirect Remedies for Externalities

Green¹,

Sheshinski²

1976

Journal of Political Economy

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This paper is concerned with tax policies designed to obtain an improved competitive allocation in the presence of consumption externalities. It is known that the full optimum can, in general, be attained only through the imposition of excise taxes at different levels for different individuals. Since these may be ruled out (possibly because of implementation costs), one is confined to consider second-best taxes. The common interpretation of the Pigouvian principle has called for taxes on the externality-creating commodities. With no relationships between the consumption of different commodities the Pigouvian principle is obviously impeccable. But the existence of substitutes or complements for an externality-causing commodity raises the possibility of indirect policies: treating the externality through the markets for related goods. Obviously, if the direct policy is not feasible, the indirect treatment may provide some partial remedy. We show, however, that even when direct policies are available, the overall optimum may involve only indirect policies. An example with such a result is provided in the paper. We also list a number of cases in which the traditional prescription is confirmed, and the overall optimum involves only direct policies.

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“…If the marginal externality that each consumer creates is constant and equal across consumers then a tax equal to the marginal external cost of each unit consumed can fully correct for the externality (Pigou (1920)). However, if marginal externalities are heterogeneous across consumers then a single linear tax can no longer achieve the first best allocation (Diamond (1973)). …”

Section: Introductionmentioning

confidence: 99%

Design of optimal corrective taxes in the alcohol market

Griffith¹,

O’Connell²,

Smith³

2017

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Alcohol consumption is associated with costs to society due to its impact on crime and health. Tax can lead consumers to internalise these externalities. We study optimal corrective taxation in the alcohol market. We allow for the fact that the externality generating commodity (ethanol) is available in many differentiated products, over which consumers might have heterogeneous preferences, and that there may also be heterogeneity in marginal externalities across consumers. We show that, if there is correlation in preferences and marginal externalities, setting different tax rates across products can improve welfare relative to a single tax rate on ethanol. We estimate a model of demand in the UK alcohol market and numerically solve for the optimal tax rates. Moving to an optimal system that taxes alcohol types at different rates would close half of the welfare gap between the current UK system and the first best.

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Consumption Externalities and Imperfect Corrective Pricing

Cited by 157 publications

References 6 publications

Alcohol taxation and regulation in the European Union

Alcohol taxation and regulation in the European Union

Direct versus Indirect Remedies for Externalities

Design of optimal corrective taxes in the alcohol market

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