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The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition

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  • Philipp J. H. Schröder

Abstract

This paper shows that the welfare dominance of ad valorem over unit taxes under imperfect competition, extends to a Dixit-Stiglitz-type monopolistic competition framework with differentiated products, increasing returns to scale, entry/exit and love of variety. This result is obtained, even though ad valorem taxation leads to increased firm exit compared to the equal-yield unit tax. Yet the smaller tax over-shift, occurring under ad valorem taxation, more than compensates this disadvantage. Copyright Springer-Verlag Wien 2004

Suggested Citation

  • Philipp J. H. Schröder, 2004. "The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition," Journal of Economics, Springer, vol. 83(3), pages 281-292, December.
    • Handle: RePEc:kap:jeczfn:v:83:y:2004:i:3:p:281-292
    DOI: 10.1007/s00712-004-0096-y
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    Cited by:

    1. Laszlo Goerke & Frederik Herzberg & Thorsten Upmann, 2014. "Failure of ad valorem and specific tax equivalence under uncertainty," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(4), pages 387-402, December.
    2. Henrik Vetter, 2016. "Tax Reform in Monopolistic Competition with Increasing Preferences for Variety," Public Finance Review, , vol. 44(2), pages 245-262, March.
    3. Valido, Jorge & Pilar Socorro, M. & Hernández, Aday & Betancor, Ofelia, 2014. "Air transport subsidies for resident passengers when carriers have market power," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 388-399.
    4. Laszlo Goerke, 2012. "The Optimal Structure of Commodity Taxation in a Monopoly with Tax Avoidance or Evasion," Public Finance Review, , vol. 40(4), pages 519-536, July.
    5. Wang, Vey & Lai, Chung-Hui, 2010. "Franchise Fee, Tax/Subsidy Policies and Economic Growth," MPRA Paper 27745, University Library of Munich, Germany.
    6. Zrinka Lukač, 2023. "Optimal tax policy for single homogeneous commodity on n markets with export costs as a Stackelberg game," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(3), pages 873-890, September.
    7. Aiura, Hiroshi & Ogawa, Hikaru, 2013. "Unit tax versus ad valorem tax: A tax competition model with cross-border shopping," Journal of Public Economics, Elsevier, vol. 105(C), pages 30-38.
    8. Laszlo Goerke, 2011. "Commodity tax structure under uncertainty in a perfectly competitive market," Journal of Economics, Springer, vol. 103(3), pages 203-219, July.
    9. Shiou-Yen Chu & Tsaur-Chin Wu, 2023. "Ad valorem versus unit taxes on capital in a dynamic stochastic general equilibrium model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1435-1456, December.
    10. Lai, Chung-hui, 2013. "(In)determinacy, bargaining, and R&D policies in an economy with endogenous technological change," Economics Discussion Papers 2013-14, Kiel Institute for the World Economy.
    11. Stefan Szymanski, 2021. "On the Incidence of an Ad Valorem Tax: The Adoption of VAT in the UK and Cost Pass Through by English Football Clubs," De Economist, Springer, vol. 169(1), pages 37-61, February.
    12. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 164-175, April.
    13. Susanne Dröge & Philipp J. H. Schröder, 2005. "Corrective Ad Valorem and Unit Taxes: A Welfare Comparison," Discussion Papers of DIW Berlin 534, DIW Berlin, German Institute for Economic Research.
    14. Lisa Grazzini, 2006. "A Note on Ad Valorem and Per Unit Taxation in an Oligopoly Model," Journal of Economics, Springer, vol. 89(1), pages 59-74, October.
    15. Henrik Vetter, 2013. "Consumption taxes in monopolistic competition: a comment," Journal of Economics, Springer, vol. 110(3), pages 287-295, November.

    More about this item

    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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