The Welfare Cost of Market Power. Accounting for Intermediate Good Firms
AbstractThe market power of firms in intermediate good markets is found to generate a substantial welfare cost. Markup pricing of intermediate good firms contributes to increase the wedge between the marginal product of labor and the wage rate received by workers, as intermediate good firms add additional markups to the unit cost of a consumer good. This creates an additional wedge in the labor market, and is costly due to the existing substantial tax wedge in the labor market. The welfare cost of distortions in the supply of labor created by market power of firms is found to be more than 40 times larger than the welfare cost of distortions in the allocation of consumer goods created by differences in market power of firms. This welfare cost is substantial compared to previous estimates.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 502.
Date of creation: Apr 2007
Date of revision:
Monopoly; Taxation; Welfare costs;
Find related papers by JEL classification:
- D60 - Microeconomics - - Welfare Economics - - - General
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-12 (All new papers)
- NEP-COM-2007-05-12 (Industrial Competition)
- NEP-MIC-2007-05-12 (Microeconomics)
- NEP-PBE-2007-05-12 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
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