Modeling the optimal fiscal policy on tobacco consumption

In this paper we model the optimal fiscal policy on three types of tobacco, namely, Virginia, black and cigars, as an instrument for controlling the social costs generated by their consumption. This fiscal policy takes the form of optimal taxes on the three goods, with these being derived on the basis of the price elasticities obtained from the estimation of an Addictive and Linear Almost Ideal Demand System (ALAIDS). When considering Spanish time-series (1964–1995), we find that the homogeneous and symmetric version of the model allows us to obtain the optimal taxes, which exhibit very small differences when compared to the social costs generated by the consumption of the three types of tobacco.