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The Welfare Cost of Imperfect Competition and Distortionary Taxation

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  • Jonsson, Magnus

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    (Research Department, Central Bank of Sweden)

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    Abstract

    The welfare cost of imperfect competition in the product and labor market as well as distortionary taxation is quantified in a dynamic general equilibrium model parameterized to fit the U.S. economy. We find that the welfare cost of imperfect competition in the product market is 35.74 percent while it is 0.66 percent in the labor market, taking the transition from the distorted to the optimal steady state into account. If we also take into account that the U.S. economy is characterized by distortionary taxation the welfare cost in the product market increases to 48.26 percent and 4.70 percent in the labor market.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 170.

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    Length: 31 pages
    Date of creation: 01 Oct 2004
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0170

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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
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    Web page: http://www.riksbank.com/
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    Keywords: monopolistic competition; distortionary taxation; welfare;

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    1. Jonsson, Magnus & Palmqvist, Stefan, 2004. "Do Higher Wages Cause Inflation?," Working Paper Series 159, Sveriges Riksbank (Central Bank of Sweden).
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