1 Department of Economics, Faculty of Social Sciences, Københavns Universitet2 Department of Economics, Faculty of Social Sciences, Københavns Universitet
Theory predicts that unit taxes increase the quality consumed in a market, since unit taxes reduce the relative price of high quality goods. Ad valorem taxes, on the other hand, have no effect on relative prices, and should not affect product quality. The hypothesis is tested empirically in the US wine market. I find that the market share of high quality wine is significantly increased by unit taxes, and that there is no significant effect of ad valorem taxes, in accordance with the hypothesis and previous empirical studies.
Journal of Agricultural and Food Industrial Organization, 2011, Vol 9, Issue 1