The signaling effect of environmental and health-based taxation and legislation for public policy : an empirical analysis

Abstract

The main objective of this article is to examine how taxes affect consumption of commodities that are detrimental to health and the environment: tobacco, alcoholic beverages, household energy and petroleum fuel (petrol) for transportation. Specifically, we examine if a tax increase leads to a significantly larger change in consumption than a producer price change, which is referred to as the signalling effect from taxation. This objective is achieved through an empirical analysis using the Linear Almost Ideal Demand System. The analysis uses aggregated cross-sectional time series data and information on major legislation introductions in Sweden, Denmark and the United Kingdom from 1970 to 2009. We find the main result to be that the signalling effect is significant for "Electricity" in Sweden and Denmark and significant for "Electricity" and "Petrol" in the United Kingdom. This implies that tax policy is more effective in tackling consumption of commodities which produce negative public effects (negative externalities affecting the social good such as pollution) than those for negative private effects (negative internalities affecting the private good such as health). ; This paper is the first of three included in the doctoral thesis, "State and Industrial Actions to Influence Consumer Behavior".