Demand for Fuel and its Consequences for Indirect Taxation: A Microeconomic View

The author uses microeconomic theory, particularly demand theory, and econometrics to investigate the impact of proposed tax changes on the consumers. The effect of taxation can be investigated in two ways: the first possibility is to construct a multi-equation model able to analyze all taxes simultaneously. The second is to create a partial model for a specific tax, which would register subtler effects. The second approach is adopted here, with an exclusive focus on fuel-product excise taxes and their microeconomic impact. Two alternative approaches, instrumental variables and the Heckman two-step selection model, are used to estimate the demand function for fuel. The estimated demand function is then used toward a tax simulation and an investigation of the tax- -change effects on different segments of the population.