Market structure, pigouvian taxation, and welfare
Using a short-run partial equilibrium model of social welfare, this paper examines the social welfare implications of changing Pigouvian taxes under three markets: perfect competition, monopoly, and Cournot oligopoly. The result for perfect competition supports the earlier finding that Pigouvian taxation increases social welfare [Buchanan, 1969]. However, in contrast to the previous result that Pigouvian taxes lower welfare under monopoly, the authors show that if the noncompetitive distortion is small, these taxes might still be useful in correcting monopoly-generated externalities and in improving social welfare. Cournot firms react to the tax depending upon their individual perceptions of the gain in post-tax marginal revenue. Policy implications of the study's results are discussed. Copyright International Atlantic Economic Society 1997
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Volume (Year): 25 (1997)
Issue (Month): 2 (June)
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- Martin, Robert E., 1986. "Externality regulation and the monopoly firm," Journal of Public Economics, Elsevier, vol. 29(3), pages 347-362, April.
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- Dennis W. Carlton & Glenn C. Loury, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 559-566.
- F. H. Hahn, 1962. "The Stability of the Cournot Oligopoly Solution," Review of Economic Studies, Oxford University Press, vol. 29(4), pages 329-331.
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- Levin, Dan, 1985. "Taxation within Cournot oligopoly," Journal of Public Economics, Elsevier, vol. 27(3), pages 281-290, August.
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