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The Demand for Vice: Inter-Commodity Interactions with Uncertainty

Kenneth Clements (), Yihui Lan () and Xueyan Zhao
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Yihui Lan: UWA Business School, The University of Western Australia

No 06-30, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: This paper analyses consumption patterns of vice -- marijuana, tobacco and alcohol. To deal with imperfect marijuana data, we exploit the interdependencies in the consumption of the three drugs identified in prior research, and introduce a Monte Carlo simulation procedure to formally account for the inherent uncertainty in marijuana-related data and parameters. To illustrate the application of the framework, we use Australian data to simulate the impact on the consumption of vice of a reduction in the price of marijuana; changes in pre-existing taxes on tobacco and alcohol; legalisation of marijuana, which is then subject to taxation; and a tax tradeoff involving the introduction of a revenue-neutral tax on marijuana that is offset by reduced alcohol taxation. The revenue-maximising tax rate for marijuana of about 50% is estimated to yield additional revenue of about 15% of the pre-existing proceeds from vice taxation. The role of uncertainty surrounding marijuana is highlighted by providing the entire probability distributions of all endogenous variables in a consistent multivariate framework.

JEL-codes: C6 D5 H2 I0 K0 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006
New Economics Papers: this item is included in nep-law and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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