Modeling techniques related to taxation policies when dealing with negative externalities

Recently, in February 2006, the Romanian government has approved the introduction of the tax on vices – on the products heavily affected the health if consumed (cigarettes and alcohol) - The tax set up is 10 euro/1.000 cigarettes, meaning 20 eurocents/cigarette pack, and 200 euro/hl alcohol. It is estimated that the measure will lead to significant price increasing and also to budgetary revenue increasing. It is estimated that the price for a cigarette package will increase in average with 37% - 38% - conforming to a study conducted by Phillip Morris International. Following this decision, the paper purpose is to analyze the impact of the introduction of the tax on vices on the social welfare trough a generalized mathematical model, suitable for the economies where negative externalities are present. Particularly, the model is suitable to analyze the tobacco consumption consequences, as this is one of the possible sources for negative externalities in an economy. Before presenting the modeling techniques, the paper contains an introduction part with data from the Romanian tobacco market and with arguments related to taxes on the tobacco consumption.