Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 274: Are demand elasticities affected by politically determined tax levels? : simultaneous estimates of gasoline demand and price

Lennart Flood (), Nizamul Islam () and Thomas Sterner ()
Additional contact information
Lennart Flood: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Nizamul Islam: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Thomas Sterner: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG

Abstract: Raising the price of fossil fuels is a key component of any effective policy to deal with climate change. Just how effective such policies are is decided by the price elasticities of demand. Many papers have studied this without recognising that not only is there a demand side response: quantities are decided by the price but also there is a reverse causality: the level of consumtion affects the political acceptability of the taxes which are the main component of the final price. Thus prices affect consumption levels, in turn, have an affect on taxes and thus consumer prices. This paper estimates these functions simultaneously to show that there is indeed an effect on the demand elasticity.

Keywords: climate change; simultaneous; tax

JEL-codes: C33; Q54

9 pages, October 15, 2007

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