The Demand for Vice: Inter-Commodity Interactions with Uncertainty

This paper introduces a simulation procedure in the context of a demand system for vice -- marijuana, tobacco and alcohol -- to formally account for the inherent uncertainty in marijuanarelated data and parameters. This entails using existing econometric estimates pertaining to the consumption of alcohol and tobacco, and the much more limited information on marijuana. As an illustrative application of the framework, we simulate the impact on the consumption of vice of a reduction in the price of marijuana; changes in pre-existing taxes on tobacco and alcohol; legalisation of marijuana, which is then subject to taxation; and a tax tradeoff involving the introduction of a revenue-neutral tax on marijuana that is offset by reduced alcohol taxation. The revenue-maximising tax rate of about 50 percent is estimated to yield additional revenue of about 15 percent of the pre-existing proceeds from vice taxation. The role of uncertainty surrounding preference interactions within vice, as well as the uncertainties regarding marijuana data, is highlighted by providing the whole distribution of each endogenous variable.