Product Variety, Scale Economies, and Environmental Taxes
We discuss how efficiently a unit tax deals with external damage problems when economies of scale characterize a monopolistically competitive market in which consumers' value product variety. It turns out that neither the number of varieties nor the quantity of each variety is at the optimum under a unit tax. Moreover, aggregate production costs are not minimized under a unit tax. For practical policy purposes, some results suggest that a Pigouvian tax can replace a tax taking into account monopoly. Our findings make this conclusion false when the number of firms is endogenous.
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Volume (Year): 9 (2009)
Issue (Month): 1 (May)
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