Sheflin price elasticity pg3

Sheflin price elasticity pg3 - The Demand for Alcoholic...

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The Demand for Alcoholic Beverages: An Aggregate Time-Series Analysis David Levy NeU Sheflin We estimate the total demand for alcoholic beverages with annual U. S. time-series data from 1940-80 using two alternative measures of alcohol consumption. By concentrating on the total demand for alcoholic beverages we subsume the cross-price effects. Our results indicate a price elasticity of (minusjO.S and an income elasticity of 0.4 and weak evidence of a somewhat higher propensity to consume alcoholic beverages by those under 21. After correcting for heteroskedasticity, the estimates are found to be statistically stable over the sample period. DAVID LEVY is Assistant Professor in the Bureau of Economic Research and NEIL SHEFLIN is Associate Professor in the Depart- ment of Economics, both at Rutgers University, New Brunswick, New Jersey 08903. They would like to thank Jim Chelius, W.C. Finnie, and two anonymous referees for helpful comments. The Bureau of Economic Research, Rutgers Univerdty, providedfinancial sup- port. The authors are responsible for any errors in this article. Taxation of alcoholic beverages has long been viewed as a means for both generating government revenues and controlling alcohol abuse. With expen- ditures on alcoholic beverages in excess of $45 billion in 1981, the revenue potential is clearly significant.' Equally significant are the social and private costs of alcohol abuse, estimated at more than $40 billion in 1977.^ The taxation of alcohol consumption raises a number of important and dif- ficult public policy issues. First, and most basically, do tax changes affect the consumption of alcohol? If so, will tax increases raise or lower total tax revenues? And should such tax policies, even if effective, be used? The answer to the first two questions depends directly on the responisiveness of alcohol consumption to changes in price—the price elasticity of demand. The third question of whether taxation should be used to control alcohol use, involves a number of difficult empirical and normative issues. These include the rela- tionship between changes in average consumption and changes in consump- tion by alcohol abusers; the external effects and social costs of such abuse; comparison of such social costs with the social benefits of reduced abuse (and possibly use); and the normative issue of the role of government in protecting individuals (and society) from themselves. This article develops estimates of the aggregate price elasticity of demand for alcoholic beverages in the U. S. Despite a considerable body of work, there is little reliable evidence as to the magnitude of the price elasticity in the U. S. Previous studies have generally examined the demand for beer, wine, and distilled spirits separately.^ While these disaggregated studies deal with rela- tively homogeneous categories, they require the determination of cross-price elasticities in order to gauge the effect of tax-induced price changes on total alcohol consumption and tax revenues. Those studies, which attempt to
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Sheflin price elasticity pg3 - The Demand for Alcoholic...

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