 Keeping up with the Joneses, consumer ethnocentrism, and optimal taxationChia-ying Liu and Juin-jen Chang Economic Modelling, 2011, vol. 28, issue 4, 1519-1525 Abstract: This paper sets up a two-good (domestically- and internationally-produced goods) model of a small open economy with consumption externalities and uses it to examine the optimal taxation. Since keeping up with the Joneses leads an individual consumption's to impose a negative externality on the consumption of others, a consumption tax and tariff are thereby socially desirable to correct this distortion. Due to the fact that the government has to account for additional distortion caused by consumer ethnocentrism and that keeping up with the Joneses in the consumption of domestic goods tends to reinforce the influence of ethnocentrism on the purchase of domestic products, the consumption of imported goods is subject to a higher tariff rate because of the cross-market externality. Of interest, if consumption only involves an own-market externality, there is no cyclical consequence for the optimal taxes. However, if consumption involves both own- and cross-market externalities, the optimal tariff is state-contingent and, more specifically, is countercyclical. Keywords: Keeping; up; with; the; Joneses; Consumer; ethnocentrism; Optimal; taxation; State-contingent; policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:4:p:1519-1525 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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