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Consumption taxes in monopolistic competition: a comment

  • Henrik Vetter

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    We show that an ad valorem tax is better than an equal-revenue unit tax when consumers spend some fixed proportion of income on taxed goods, when firms use constant mark-up pricing, and entry and exit drive per-firm profit to zero. These key assumptions implies that ad valorem taxes are superior in oligopoly as well as monopolistic competition, showing that earlier results on taxes in monopolistic competition (Schröder in J Econ 83(3):281–292, 2004 ) are not due to the mode of competition, but rather are due to the functional forms used. Copyright Springer-Verlag Wien 2013

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    File URL: http://hdl.handle.net/10.1007/s00712-012-0320-6
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    Article provided by Springer in its journal Journal of Economics.

    Volume (Year): 110 (2013)
    Issue (Month): 3 (November)
    Pages: 287-295

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    Handle: RePEc:kap:jeczfn:v:110:y:2013:i:3:p:287-295
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    1. Philipp J. H. Schröder, 2003. "The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition," Discussion Papers of DIW Berlin 333, DIW Berlin, German Institute for Economic Research.
    2. Leslie Reinhorn, 2012. "Optimal taxation with monopolistic competition," International Tax and Public Finance, Springer, vol. 19(2), pages 216-236, April.
    3. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    5. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    6. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer, vol. 16(2), pages 164-175, April.
    7. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, vol. 99(1), pages 458-71, March.
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