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Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly In General Equilibrium

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  • Charles Blackorby

    (Department of Economics, University of Warwick and GREQAM)

  • Sushama Murty

    (Department of Economics, University of Exeter)

Abstract

Employing a general equilibrium framework, Blackorby and Murty [2007] prove that, with a monopoly and under one hundred percent profit taxation and uniform lump-sum transfers, the utility possibility sets of economies with unit and ad valorem taxes are identical. This welfare-equivalence is in contrast to most previous studies, which demonstrate the superiority of the ad valorem tax in a partial equilibrium framework. In this paper we relax the assumption of one hundred percent profit taxation and allow the consumers to receive profit incomes from ownership of shares in the monopoly firm. We find that, under certain regularity conditions, for any fixed vector of profit shares, the utility possibility sets of economies with unit and ad valorem taxes are not generally identical. But it does not imply that one completely dominates the other. Rather, the two utility possibility frontiers cross each other. Additionally, employing a standard partial equilibrium welfare analysis, we show that the Marshallian social surpluses resulting from the two tax structures are identical when the government can implement unrestricted transfers.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1011.

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Date of creation: 2010
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Handle: RePEc:exe:wpaper:1011

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Keywords: Ad Valorem taxes; unit taxes; monopoly; private ownership economy; general equilibrium; second-best Pareto optimality.;

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  1. Charles Blackorby & Sushama Murty, 2010. "Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly In General Equilibrium," Discussion Papers 1011, Exeter 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. Blackorby, Charles & Diewert, W E, 1979. "Expenditure Functions, Local Duality, and Second Order Approximations," Econometrica, Econometric Society, vol. 47(3), pages 579-601, May.
  4. Guesnerie Roger & Laffont Jean-jacques, 1978. "Taxing price makers," CEPREMAP Working Papers (Couverture Orange) 7806, CEPREMAP.
  5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
  6. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  7. repec:cup:cbooks:9780898718966 is not listed on IDEAS
  8. 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.
  9. Blackorby, Charles & Murty, Sushama, 2007. "Unit versus ad valorem taxes: Monopoly in general equilibrium," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 817-822, April.
  10. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
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Cited by:
  1. Charles Blackorby & Sushama Murty, 2013. "Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly in General Equilibrium," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(4), pages 547-579, 08.
  2. Laszlo Goerke, 2011. "Commodity Tax Structure under Uncertainty in a Perfectly Competitive Market," CESifo Working Paper Series 3339, CESifo Group Munich.

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