An alternative way to model merit good arguments

Provided by Research Papers in Economics

An alternative way to model merit good
arguments*

Fred Schroyen^

First version: September 2002
This version: October 2003

Abstract Besley (1988) uses a scaling approach to model merit good arguments
in commodity tax policy. In this paper, I question this approach on the grounds
that it produces ’wrong’ recommendations—taxation (subsidisation) of merit (de-
merit) goods—whenever the demand for the (de)merit good is inelastic. I propose
an alternative approach that does not suffer from this deficiency, and derive the
ensuing first and second best tax rules, as well as the marginal cost expressions
to perform tax reform analysis.

JEL code: H21

Keywords: merits goods, commodity taxation, tax reform analysis

*This version of the paper was written while visiting the Dept. of Economics, Universitat
Autonoma de Barcelona, which provided a very friendly and hospitable work environment.
Financial support by the Programme for Health Economics in Bergen (HEB) through an SNF
grant is gratefully acknowledged. I should like to thank Kjetil Bjorvatn, Bart Capéau, Agnar
Sandmo, Bertil Tungodden and two anonymous referees for helpful comments and discussions.
Remaining flaws are entirely mine.

⅛ept. of Economics, Norwegian School of Economics & Business Administration, Helleveien
30, N-5045 Bergen (Norway). E-mail: fred.schroyen@nhh.no.

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