[adamc]

I would expect it to work badly whenever a person could easily cross a boundary. In larger cities -- say, New York -- it would suffer similar, but fewer, problems simply because the average effort of getting outside the city would be higher.

You see this between states when tax regimes differ. Sure, those who live near the border "cheat". But most people live far enough away that they are affected by the tax.

There is lots of counter-evidence to your propositions, notably involving the effect of raising prices on cigarettes, which does discourage smoking.