This paper deals with optimal income and commodity taxation in an economy, where alcohol is an externality …-generating consumption good. In our model, alcohol can be bought domestically, imported (via border trade) or produced illegally. Border … trade implies an incentive to set the domestic alcohol tax below the marginal social damage of alcohol, and to tax …

This paper deals with optimal income and commodity taxation in an economy, where alcohol is an externality …-generating consumption good. In our model, alcohol can be bought domestically, imported, or produced illegally. Border trade alone implies an … incentive to set the domestic alcohol tax below the marginal social damage of alcohol, and to tax (subsidize) commodities that …