An alternative way to model merit good arguments



The first order conditions are shown in the appendix to provide us with the
following tax rules:

tx


u2 /       ʌ u2 /

(6a)

(6b)


— (z,χ,y) - — (z,χ,
u1            u1

g

u3           u3

ty = —(z,x,y) - — (z,x,y)

u1             ug1

who have the intuitive interpretation of driving a wedge between the consumer’s
marginal willingness to pay (MWP) for each good, and that of the government.

3 Besley’s scaling approach

Besley (1988) proposes the following specification for the government’s evaluation

function:

ug(z, x, y) = u(z, x, θy).                              (7)

and defines the third commodity as a merit (demerit) good whenever θ > (<)1.
This scaling approach dates back to Fisher & Shell (1967) who used it to construct
an index for the true cost of living when people’s tastes change or when products
change in quality. In the present context, the government converts the quantity
of the (de)merit good into efficiency units, but otherwise fully respects individual
preferences.

With this specification, the earlier derived tax rules become5

tχ = — (z,x,y) - — (z,x, θy),                    (8a)

u1            u1

ty = u3(z,x,y) θu1 (z,x, θy).                   (8b)

To see what these rules imply, consider the preference ordering represented
by the CES utility function u
(z,x,y) = (α1zρ + α2xρ + a3yp)1/p, with αi 0
(i = 1, 2, 3), and -∞ < ρ < 1. With such preferences, uu3 = αα3 (У)P 1, τ÷ =
—θ (θy)ρ 1 and u2 = ug = α2 (x}ρ 1. No tax should be levied on the standard
α1 z                      u1 u1 α z

commodity, while for the (de)merit good, we have

ty   (1 θρ)

(9)


qy       θ

Whenever the elasticity of substitution is below one (-∞ < ρ < 0), we get the
paradoxical result that a merit good should be taxed while a demerit good should
be subsidised!

5In deriving the first best rule for the tax on the (de)merit good (8b), Besley (1988) made
a mistake. The correct rule was provided in a comment by Feehan (1990).



More intriguing information

1. LIMITS OF PUBLIC POLICY EDUCATION
2. The name is absent
3. Performance - Complexity Comparison of Receivers for a LTE MIMO–OFDM System
4. Testing the Information Matrix Equality with Robust Estimators
5. Tariff Escalation and Invasive Species Risk
6. The name is absent
7. The name is absent
8. The Impact of Cognitive versus Affective Aspects on Consumer Usage of Financial Service Delivery Channels
9. The name is absent
10. Temporary Work in Turbulent Times: The Swedish Experience
11. Fortschritte bei der Exportorientierung von Dienstleistungsunternehmen
12. Convergence in TFP among Italian Regions - Panel Unit Roots with Heterogeneity and Cross Sectional Dependence
13. DEVELOPING COLLABORATION IN RURAL POLICY: LESSONS FROM A STATE RURAL DEVELOPMENT COUNCIL
14. The name is absent
15. The name is absent
16. The name is absent
17. Spectral calibration of exponential Lévy Models [1]
18. SME'S SUPPORT AND REGIONAL POLICY IN EU - THE NORTE-LITORAL PORTUGUESE EXPERIENCE
19. sycnoιogιcaι spaces
20. The name is absent