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Per Unit Versus As Valorem Taxes Under Dynamic Monopoly

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  • Luca Bossi

    ()
    (Department of Economics, University of Miami)

Abstract

In the partial equilibrium framework of a static monopoly, ad valorem taxes always Pareto dominate per unit taxes. This paper shows that this result can actually be reversed in a dynamic framework where the government generates an exogenous stream of revenues through the taxation of commodities produced by a dynamic monopoly (i.e. a single producer facing dynamic demands for an intertemporal good). We show that per unit taxes Pareto dominate ad valorem taxes provided that the per period demands are relatively elastic. We provide a taxonomy concerning the Pareto dominance of the tax systems in this context and numerical examples that support our theoretical results.

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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0703.

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Length: 17 pages
Date of creation: 27 Sep 2007
Date of revision:
Publication status: Forthcoming: In preparation for submission
Handle: RePEc:mia:wpaper:0703

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Related research

Keywords: Dynamic monopoly; per unit taxes; ad valorem taxes;

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References

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  1. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  2. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  3. 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.
  4. Benabou, R. & Tirole, J., 2001. "Willpower and Personal Rules," Papers 216, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. 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.
  6. Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
  7. Luca Bossi & Vladimir Petkov, 2007. "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics.
  8. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  9. Igal Hendel & Paolo Dudine & Alessandro Lizzeri, 2006. "Storable Good Monopoly: The Role of Commitment," American Economic Review, American Economic Association, vol. 96(5), pages 1706-1719, December.
  10. Hamilton, Stephen F., 1999. "The comparative efficiency of ad valorem and specific taxes under monopoly and monopsony," Economics Letters, Elsevier, vol. 63(2), pages 235-238, May.
  11. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
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Cited by:
  1. Mackay, Daniel, 2011. "Estimating the impact of investment tax credits on aircraft demand," MPRA Paper 32767, University Library of Munich, Germany.

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