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Efficient mercantilism? Revenue-maximizing monopoly policies as Ramsey taxation

  • Congleton, Roger D.
  • Lee, Sanghack

The economics literature on mercantilism tends to emphasize gold hoarding and external barriers to trade as defining characteristics. Medieval institutions, however, included a host of internal barriers to trade as well as external ones, and monopoly privileges and high offices were often for sale. In this paper, we analyze how a stable unitary government's regulatory policies may be affected by revenues and other services generated by the efforts of rent seekers. Competition for monopoly privilege can be a significant source of government revenue that augments tax revenues, especially in settings in which collecting ordinary tax revenues is problematic. A revenue-maximizing government encourages greater monopolization than is compatible with economic efficiency, but sells monopoly privileges in a manner that promotes innovation and partially accounts for the deadweight losses associated with monopolized markets. Our analysis provides a possible public finance explanation for relatively successful authoritarian states that have relatively little corruption, but many internal and external barriers to trade.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 25 (2009)
Issue (Month): 1 (March)
Pages: 102-114

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Handle: RePEc:eee:poleco:v:25:y:2009:i:1:p:102-114
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