The Question
What is the relationship between the price of alcohol and demand for leisure activities?
What We Found
Alcohol and leisure were complements in most model specifications, indicating that higher alcohol taxes are associated with a lower demand for leisure activities.
Why It Matters
The optimal tax on alcohol may be higher than previously acknowledged, because higher alcohol taxes may increase productivity.
Abstract
This paper provides a first attempt to estimate the cross-price elasticity between alcoholic beverages and leisure, which is critical for assessing how much alcohol taxation might be warranted on fiscal grounds. We estimate a demand system defined over alcohol, leisure, and other goods, using data from the Consumer Expenditure Survey and other sources. Our results suggest that alcohol is a relative complement for leisure over a range of specifications. This implies that the optimal alcohol tax may substantially exceed the Pigouvian tax, reinforcing the efficiency case for higher taxation. These findings should be viewed as preliminary, however, given data and other limitations
Keywords
alcohol
