Can we infer external effects from a study of the Irish indirect tax system?

Abstract

This paper estimates implied external effects for the Irish indirect tax system for the year 1987. The study uses the inverse optimum technique of Christiansen and Jansen (1978) which estimates implied external effects, given the assumption that the economy is at an optimum with regard to the indirect tax system. External effects are estimated for three goods: tobacco, alcohol and petrol and in all cases the estimated external effects are of the expected sign. The paper also estimates the implied degree of inequality aversion in the Irish indirect tax system and finds that the government's social welfare function as implied by the indirect tax system is virtually utilitarian.