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Welfare Effects of Commodity Taxation

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  • Fritz Helmedag

    (Economics Department, Chemnitz University of Technology, Chemnitz, Germany)

Abstract

In reality firms most often face negatively sloped demand curves. Then, for a given level of consumers’ surplus, levies on prices yield higher fiscal revenues than specific duties. Therefore, according to the prevailing view, the switch from unit to ad valorem taxation is supposed to generate more welfare; some even speak of an associated Pareto-improvement. However, this is not true because taxing prices merely transfers profits to the Treasury, while total rent remains unaffected. Since excise duties diminish the welfare gain in comparison with untaxed trade, an appropriately designed income tax allows all parties to benefit. Sales should be taxed only exceptionally.

Suggested Citation

  • Fritz Helmedag, 2023. "Welfare Effects of Commodity Taxation," Journal of Economic Analysis, Anser Press, vol. 2(2), pages 1-13, March.
    • Handle: RePEc:bba:j00001:v:2:y:2023:i:2:p:1-13:d:34
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    References listed on IDEAS

    as
    1. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "The efficiency of indirect taxes under imperfect competition," Journal of Public Economics, Elsevier, vol. 81(2), pages 231-251, August.
    2. 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.
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