This article compares the effects of two policies aimed at promoting efficiency in the
taxation of alcoholic beverages. One policy is to set alcohol tax rates at a level that
corrects for excessive social costs of alcohol consumption. The second is to view
alcohol taxes as a substitute for other taxes and apply the prescriptions of optimal
tax theory to attain the efficient mix of tax revenues. Estimates of the differential
effects of the two policies suggest that the second policy requires a higher tax rate
on alcohol and produces a greater welfare gain.
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