Achieving Environmental Sustainability through Fiscal Policy
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Julsuchada Sirisom, Hope Ashiabor and Janet E. Milne
Chapter 12: Price Signal or Tax Signal? An International Panel Data Analysis on Gasoline Demand Reaction
Seung-Joon Park 1. INTRODUCTION In general, the effect of energy taxes on energy consumption is estimated by calculating the price elasticity, where the tax rate is treated merely as a part of consumer prices. However, it has been argued that a unit change in tax rate has a stronger effect on energy demand than a similar change in price because of the so called ‘signaling effect of tax’ (Ghalwash 2007). The argument for the ‘signaling effect’ follows. Once an energy tax is set, it is likely to be maintained for a long time. On the other hand, energy demand responds not only to current price changes but also to future price prospects. In particular, energy consumers choose their appliances based on the future outlook of price development. Therefore, the tax rate, which is unlikely to decrease again, will have a stronger effect on demand than prices do, as prices may unexpectedly decrease sooner or later. Although it is commonly known that the long-term price elasticity is generally greater than short-term elasticity, the signaling effect may be exerted soon after a change in the tax rate. The empirical studies related to this effect are, for example, Ghalwash (2007) and Bardazzi, Oropallo and Pazienza (2009). Both studies proved that ‘tax elasticity’ is greater than ‘price elasticity’. The former is based on Swedish consumption data using the Almost Ideal Demand System (AIDS) and the latter is based on Panel Data analysis with data from 5600 Italian companies. However, the ‘tax elasticity’ calculated using...
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