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ABSTRACT This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different… Click to show full abstract
ABSTRACT This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different results regarding tax revenue maximization. With nonzero but weak cross-elasticity effects relative to the price elasticity, we derive a higher optimal tax-price ratio compared to prior research. With strong cross-elasticity, revenue can continually be increased by raising the excise tax. Overall, the study offers government greater incentive to use excise taxes to obtain revenue.
Journal Title: Applied Economics Letters
Year Published: 2017
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