Taxes and quality: A market-level analysis

A conventional assumption of product homogeneity when the commodity of interest is actually heterogeneous will lead to errors in an analysis of the incidence of policies, such as taxes. In this article, an equilibrium displacement model is used to derive analytical solutions for price, quantity, and quality effects of ad valorem and per unit taxes. The results show how parameters determine the effects of tax policies on quality. The potential for tax-induced distortions in quality, and the distributive consequences of those distortions, are illustrated in a case study of the market for Australian wine.