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The Demand for Vice: Inter-Commodity Interactions with Uncertainty

Author

Listed:
  • Kenneth W Clements

    (UWA Business School, The University of Western Australia)

  • Yihui Lan

    (UWA Business School, The University of Western Australia)

  • Xueyan Zhao

    (Department of Econometrics and Business Statistics, Monash University)

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.

Suggested Citation

  • Kenneth W Clements & Yihui Lan & Xueyan Zhao, 2006. "The Demand for Vice: Inter-Commodity Interactions with Uncertainty," Economics Discussion / Working Papers 06-30, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:06-30
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    References listed on IDEAS

    as
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    Cited by:

    1. Kenneth W. Clements & Yihui Lan & Xueyan Zhao, 2005. "The Demand for Vice: Inter-Commodity Interactions with Uncertainty," Economics Discussion / Working Papers 05-30, The University of Western Australia, Department of Economics.
    2. George Verikios, 2004. "A Model of the World Wool Market," Economics Discussion / Working Papers 04-24, The University of Western Australia, Department of Economics.
    3. Kenneth W. Clements & Xueyan Zhao, 2005. "Economic Aspects of Marijuana," Economics Discussion / Working Papers 05-28, The University of Western Australia, Department of Economics.
    4. Verikios, George, 2009. "Modelling the world wool market: A hybrid approach," Economic Modelling, Elsevier, vol. 26(2), pages 418-431, March.
    5. Kenneth Clements & Yihui Lan & Xueyan Zhao, 2010. "The demand for marijuana, tobacco and alcohol: inter-commodity interactions with uncertainty," Empirical Economics, Springer, vol. 39(1), pages 203-239, August.
    6. George Verikios, 2006. "Understanding the World Wool Market: Trade, Productivity and Grower Incomes. Part 4: Model Data and Parameters," Economics Discussion / Working Papers 06-22, The University of Western Australia, Department of Economics.
    7. James Fogarty, 2004. "The Own-Price Elasticity of Alcohol: A Meta-Analysis," Economics Discussion / Working Papers 04-01, The University of Western Australia, Department of Economics.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • K0 - Law and Economics - - General
    • I0 - Health, Education, and Welfare - - General
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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