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Per Unit Versus As Valorem Taxes Under Dynamic Monopoly

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Author Info
Luca Bossi () (Department of Economics, University of Miami)

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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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File URL: http://moya.bus.miami.edu/~lbossi/unitadv_web.pdf
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Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0703.

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Length: 17 pages
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Handle: RePEc:mia:wpaper:0703

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

Find related papers by JEL classification:
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly

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  2. 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. [Downloadable!] (restricted)
  3. Paolo Dudine & Igal Hendel & Alessandro Lizzeri, 2006. "Storable Good Monopoly: The Role of Commitment," American Economic Review, American Economic Association, vol. 96(5), pages 1706-1719, December. [Downloadable!]
  4. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring. [Downloadable!] (restricted)
  5. 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.
  6. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law & Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  7. Benabou, R. & Tirole, J., 2001. "Willpower and Personal Rules," Papers 216, Princeton, Woodrow Wilson School - Public and International Affairs.
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  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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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  10. Luca Bossi & Vladimir Petkov, . "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics. [Downloadable!]
  11. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February. [Downloadable!]
  12. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August. [Downloadable!] (restricted)
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