Demand for Durable and Nondurable Goods, Environmental Policy and Consumer Welfare

If a tax on energy affects the demand for a nondurable good, the stock of a durable good, and the proportion of the energy consumption per unit of service of the durable good, an integrated approach for investigating consumer demand for durables and nondurables is required. The purpose of this paper is to employ the concept of a variable expenditure function with quasi-fixed durable goods as arguments in order to derive a demand system for nondurable goods in prices of the nondurables, in the stocks of durables, and in variable expenditure. From the envelope condition desired stocks of durables can be calculated and investment demand for durables can be determined. For an application the authors choose a variable expenditure function based on the almost ideal demand specification, and evaluate alternative environmental policy measures using the equivalent variation for comparing the welfare effects. Copyright 1991 by John Wiley & Sons, Ltd.