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Monopolistic Competition and Increasing Returns: Implications for Optimal Fiscal Policies and Over-entry

  • Chien-Yin Chen


    (Department of Economics, Natinal Taipei University)

  • Fu-Sheng Hung


    (Department of Economics, National Chengchi University)

By separating monopolistic competition from increasing returns to fully disentangle their corresponding effects, this paper find that optimal tax rates on factor incomes are decreasing in the degree of increasing returns, but are independent of the degree of market power. Moreover, free entry may lead to over or too little entry relative to the social optimum, depending on the relative strengths of the effects from increasing returns, market power, and congestion. These conclusions are different from the recent study that uses the same parameter to characterize increasing returns and monopolistic competition.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 2 ()
Pages: 1142-1150

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Handle: RePEc:ebl:ecbull:eb-11-00542
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  1. Juin-jen Chang & Hsiao-wen Hung & Jhy-yuan Shieh & Ching-chong Lai, 2007. "Optimal Fiscal Policies, Congestion and Over-entry," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 137-151, 03.
  2. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
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