Large Taxes, Status Goods, and Piracy

This paper studies the design of indirect redistributive taxation and of corrective taxation in the presence of status goods, allowing for the possibility that illegal copies of those goods may be purchased on black markets (the phenomenon of piracy). Heavy taxation of status goods, despite the fact that these are typically overconsumed, is not particularly favored in a context of social-welfare maximization, because the tax is highly distortionary, due to the presence of piracy. It is also noted that corrective taxation, aimed at remedying the inefficiencies associated with the consumption externalities generated by the status goods, is made ineffective by piracy.