Demand and distance: Evidence on cross-border shopping

An important issue for commodity taxation is the extent to which changes in foreign taxes affect the extent of cross-border shopping and thereby, domestic tax revenue. We use data from Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location's distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.3 in the border region; moving 150 (400) km inland reduces the cross-price elasticity to 0.2 (0.1). Our estimates suggest that a recent Danish cut in the spirits tax reduced Swedish tax revenues from spirits sales by more than 2%, and that an attempt by Sweden to cut taxes in response would reduce tax revenues further. (c) 2006 Elsevier B.V. All rights reserved.