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The Value of Broadband and the Deadweight Loss of Taxing New Technology

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Austan Goolsbee

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Abstract

With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11994.

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Date of creation: Feb 2006
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Handle: RePEc:nbr:nberwo:11994

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H2 - Public Economics - - Taxation, Subsidies, and Revenue
D6 - Microeconomics - - Welfare Economics

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  1. Nicholas Economides & Joacim Tag, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-27, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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  2. Pollock, R., 2009. "The Economics of Public Sector Information," Cambridge Working Papers in Economics 0920, Faculty of Economics, University of Cambridge. [Downloadable!]
  3. Maija Gao & Ari Hyytinen & Otto Toivanen, 2005. "Demand for Mobile Internet: Evidence from a Real-World Pricing Experiment," Discussion Papers 964, The Research Institute of the Finnish Economy. [Downloadable!]
  4. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute, revised Mar 2007. [Downloadable!]
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  5. Austan Goolsbee, 2001. "The Implications of Electronic Commerce for Fiscal Policy (and Vice Versa)," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 13-23, Winter. [Downloadable!] (restricted)
  6. Roberto Burguet & R. McAfee, 2009. "License prices for financially constrained firms," Journal of Regulatory Economics, Springer, vol. 36(2), pages 178-198, October. [Downloadable!] (restricted)
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