Detoxing by Taxing - A National Tax on Clothes Containing Chemicals?

Abstract

Growing wealth and globalization have lead to increasing consumption of clothes and shoes in Sweden. Environmental organizations have shown that some clothes and shoes contain chemicals that are hazardous for both the environment and health. The Swedish Chemicals Agency (KemI) suggests that a tax should be imposed on this group of goods in order to diminish the use of hazardous chemicals. We examine whether such a tax would achieve this purpose by studying consumer behavior in Sweden and by estimating the price elasticity of demand for clothes and shoes. We compare our estimate with elasticities found in literature for Sweden and the UK. Our conclusion is that clothing and shoes are luxury goods in Sweden with our estimated income elasticity being 1.26. Further, Swedish consumers are price sensitive with a price elasticity of demand of -2.80 which indicates that an excise tax would correct for the externality. This might be overestimated due to the simple approach we use, but we do believe that the true elasticity lies somewhere between ours and the ones found in literature.