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The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition

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  • Sofia Delipalla
  • Michael Keen

Abstract

This paper compares ad valorem and specific taxation in two models of oligopoly, with and without free entry. Predominantly ad valorem taxation implies a relative low consumer price, high tax revenue and (when entry is precluded) low profits. Ad valorem taxation dominates specific from the welfare perspective: the set of circumstances under which (with free entry) specific taxation raises welfare is a strict subset of that in which ad valorem taxation is welfare-improving, and in both models the maximization of consumer welfare subject to a binding revenue constraint requires maximum reliance on ad valorem taxation.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_821.pdf
File Function: First version 1991
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 821.

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Date of creation: Mar 1991
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Handle: RePEc:qed:wpaper:821

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