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The Efficiency of Indirect Taxes under Imperfect Competition

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Author Info
Simon P. Anderson ()
Andre de Palma ()
Brent Kreider ()

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Abstract

This paper considers the relative efficiency of ad valorem and unit taxes in imperfectly competitive markets. We provide a simple proof that ad valorem taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. Ad valorem taxation is superior with free entry under Cournot competition, but not necessarily under price competition when consumers value variety.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap342.pdf
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Publisher Info
Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 342.

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Length: 28 pages
Date of creation: Feb 2000
Date of revision:
Handle: RePEc:vir:virpap:342

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Web page: http://www.virginia.edu/economics/home.html

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Related research
Keywords: Excise tax; unit tax; specific tax; ad valorem tax; tax efficiency; product differentiation; imperfect competition;

Other versions of this item:

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

Cited by:
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  1. Martin Peitz & Markus Reisinger, 2009. "Indirect Taxation in Vertical Oligopoly," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
    • Martin Peitz & Markus Reisinger, 2009. "Indirect Taxation in Vertical Oligopoly," Discussion Papers 255, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  2. Hans Jarle Kind & Marko Köthenbürger & Guttorm Schjelderup, 2005. "Do Consumers Buy Less of a Taxed Good?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Susanne Dröge & Philipp J. H. Schröder, 2005. "Corrective Ad Valorem and Unit Taxes: A Welfare Comparison," Discussion Papers of DIW Berlin 534, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  4. Kind, Hans Jarle & Schjelderup, Guttorm & Stähler, Frank, 2007. "Newspapers and Advertising: The Effects of Ad-Valorem Taxation under Duopoly," Discussion Papers 2007/5, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  5. Lapan, Harvey E. & Hennessy, David A., 2007. "Unit vs. Ad Valorem Taxes in Multi-Product Cournot Oligopoly," Staff General Research Papers 12780, Iowa State University, Department of Economics. [Downloadable!]
  6. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Ramón Torregrosa, 2008. "Macroeconomic effects of an indirect tax substitution," Journal of Economics, Springer, vol. 94(3), pages 199-221, September. [Downloadable!] (restricted)
  8. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," Asia-Pacific Financial Markets, Springer, vol. 11(6), pages 763-772, November. [Downloadable!] (restricted)
    Other versions:
  9. Hennessy, David A., 2005. "Biosecurity and Infectious Animal Disease," Staff General Research Papers 12475, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  10. Kind, Hans Jarle & Koethenbuerger, Marko & Schjelderup, Guttorm, 2007. "Taxation in Two-Sided Markets," Discussion Papers 2007/3, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  11. François Boldron & Cyril Hariton, 2003. "Access charge and imperfect competition," Recherches économiques de Louvain, De Boeck Université, vol. 69(3), pages 319-340. [Downloadable!]
    Other versions:
  12. X. Wang & Jingang Zhao, 2009. "On the efficiency of indirect taxes in differentiated oligopolies with asymmetric costs," Journal of Economics, Springer, vol. 96(3), pages 223-239, April. [Downloadable!] (restricted)
  13. Luca Colombo & Paola Labrecciosa & Patrick Paul Walsh, 2005. "Optimal Corporation Tax: An I.O. Approach," The Institute for International Integration Studies Discussion Paper Series iiisdp97, IIIS. [Downloadable!]
    Other versions:
  14. S. P. Anderson & A. de Palma & B. Kreider, 2000. "Tax Incidence in Differentiated Product Oligopoly," THEMA Working Papers 2000-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  15. Philipp J. H. Schröder, 2003. "The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition," Discussion Papers of DIW Berlin 333, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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This page was last updated on 2009-12-15.

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