In this paper we present a method of computing the social cost of optimal taxes. We calibrate the Ramsey equilibrium for three standard models of imperfect competition. These settings are different in number of sources of market distortion and number of tax instruments. Our calibration clearly shows that optimal taxes in an imperfectly competitive economy incur lower social cost than in a competitive economy, implying that they are generally more efficient as competition enhancing policy tools. We find that optimal taxes in our models can cost up to 17% less forgone consumption relative to those in a competitive market economy. Such costs, in terms of forgone consumption, represent a combined measure of welfare loss and administration cost of taxes.
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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number
E2005/6.
Find related papers by JEL classification: D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
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