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Pass-Through and the Welfare Effects of Taxation under Imperfect Competition: A General Analysis

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  • Takanori ADACHI
  • Michal Fabinger

Abstract

This paper provides a comprehensive analysis of welfare effects of taxation under imperfect competition. Specifically, in relation to tax pass-through, we provide “sufficient statistics” formulas for two welfare measures under a fairly general class of demand, production cost, and market competition. The measures are (i) marginal value of public funds (i.e., the marginal loss of social welfare due to an increase in government revenue), and (ii) incidence (i.e., the ratio of a marginal change in consumer surplus to a marginal change in producer surplus). We begin with the case of symmetric firms facing both unit and ad valorem taxes to derive a simple and empirically relevant set of formulas. Then, we provide a substantial generalization of these results to encompass firm heterogeneity by using the idea of tax revenue specified as a general function parameterized by a vector of tax parameters.

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  • Takanori ADACHI & Michal Fabinger, 2021. "Pass-Through and the Welfare Effects of Taxation under Imperfect Competition: A General Analysis," Discussion papers e-21-003, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-21-003
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    References listed on IDEAS

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    Cited by:

    1. Häckner, Jonas & Herzing, Mathias, 2022. "Tax incidence in oligopolistic markets," Economics Letters, Elsevier, vol. 213(C).

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    More about this item

    Keywords

    Imperfect Competition; Pass-through; Marginal Value of Public Funds; Incidence; Sufficient Statistics;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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