Estimation of elasticities and optimal taxes on the most consumed goods in Mexico

Abstract

We estimate cross and direct elasticities for food products in Mexico. We consider Mexico’s most consumed goods, which are tortillas, meat, chicken, milk, eggs, onion, chili pepper, kidney beans, soft drinks and water. We find that using the methodology of Deaton to estimate elasticities creates difficulties when applying it to rural zones and cross-elasticities. We further use the estimated elasticities to find the optimal taxes for these products, to evaluate whether an optimal tax reform would call for greater consumer taxes or subsidies.