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A Note on the Efficiency of Indirect Taxes in an Asymmetric Cournot Oligopoly

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  • Judy Hsu

    ()
    (Feng Chia University, Taiwan)

  • X. Henry Wang

    ()
    (University of Missouri-Columbia, USA)

Abstract

Based on product homogeneity and Cournot competition, a recurrent finding in the literature is that ad valorem taxation is welfare superior to unit taxation in noncompetitive markets. This paper first observes that with asymmetric costs inefficient firms are more likely to be inactive in equilibrium under ad valorem taxation than under unit taxation. It is then illustrated that if the inefficient firms¡¯ unit costs and/or the ad valorem tax rate are high enough then unit taxation can be welfare superior to ad valorem taxation.

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Bibliographic Info

Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

Volume (Year): 1 (2011)
Issue (Month): (February)
Pages: 53-59

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Handle: RePEc:bap:journl:110105

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Related research

Keywords: Unit tax; Ad valorem tax; Cournot competition;

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References

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  1. Anderson, Simon & de Palma, Andre & Kreider, Brent, 2001. "The Efficiency of Indirect Taxes Under Imperfect Competition," Staff General Research Papers 5203, Iowa State University, Department of Economics.
  2. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
  3. Kay, J. A. & Keen, M. J., 1983. "How should commodities be taxed? : Market structure, product heterogeneity and the optimal structure of commodity taxes," European Economic Review, Elsevier, vol. 23(3), pages 339-358, September.
  4. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  5. X. Wang & Jingang Zhao, 2009. "On the efficiency of indirect taxes in differentiated oligopolies with asymmetric costs," Journal of Economics, Springer, vol. 96(3), pages 223-239, April.
  6. Vincenzo Denicolo & Massimo Matteuzzi, 2000. "Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies," International Tax and Public Finance, Springer, vol. 7(3), pages 335-342, May.
  7. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
  8. Kamien, Morton I. & Oren, Shmuel S. & Tauman, Yair, 1992. "Optimal licensing of cost-reducing innovation," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 483-508.
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