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The simple analytics of tobacco taxation with illegal supply
Author(s) -
Irvine Ian,
Sims William
Publication year - 2014
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12112
Subject(s) - excise , externality , economics , jurisdiction , tax revenue , consumption (sociology) , yield (engineering) , counterintuitive , supply and demand , revenue , microeconomics , public economics , macroeconomics , finance , philosophy , social science , materials science , epistemology , sociology , political science , metallurgy , law
This paper examines the impact of tobacco excise taxes where legal and illegal supplies coexist. The government's objective is to minimize cigarettes smoked in the economy (or to maximize revenue or to minimize illegal activity). It reacts to a competitive illegal supply in an adjoining jurisdiction. A model of consumer choice is used to demonstrate how demand response to tax changes can yield counterintuitive results. While the model mimics the Canadian market, similar situations characterize the US and European markets. A novel element of the paper is the treatment of externalities on the supply side rather than the demand side.