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The Efficiency of Indirect Taxes Under Imperfect Competition

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  • Anderson, Simon
  • de Palma, Andre
  • Kreider, Brent

Abstract

This paper considers the relative efficiency of ad valorem and unit taxes in imperfectly competitive markets. We provide a simple proof that ad valorem taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. Ad valorem taxation is superior with free entry under Cournot competition, but not necessarily under price competition when consumers value variety.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5203.

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Date of creation: 01 Aug 2001
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Publication status: Published in Journal of Public Economics, August 2001,, pp. 231-251
Handle: RePEc:isu:genres:5203

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. Hamilton, Stephen F., 1999. "Tax incidence under oligopoly: a comparison of policy approaches," Journal of Public Economics, Elsevier, vol. 71(2), pages 233-245, February.
  2. ANDERSON, Simon P. & DE PALMA, André & NESTEROV, Yurii, 1994. "Oligopolistic Competition and the Optimal Provision of Products," CORE Discussion Papers 1994034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Novshek, William., 1984. "On the Existence of Cournot Equilibrium," Working Papers 517, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. S. P. Anderson & A. de Palma & B. Kreider, 2000. "Tax Incidence in Differentiated Product Oligopoly," THEMA Working Papers 2000-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  6. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
  7. 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.
  8. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  9. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
  10. 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.
  11. 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.
  12. Besley, Timothy, 1989. "Commodity taxation and imperfect competition : A note on the effects of entry," Journal of Public Economics, Elsevier, vol. 40(3), pages 359-367, December.
  13. Robson, Arthur J, 1990. "Stackelberg and Marshall," American Economic Review, American Economic Association, vol. 80(1), pages 69-82, March.
  14. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  15. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer, vol. 3(1), pages 29-44, January.
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