IDEAS home Printed from https://ideas.repec.org/a/wly/mgtdec/v41y2020i3p415-425.html
   My bibliography  Save this article

Indirect taxation with shadow cost of public funds in mixed oligopoly

Author

Listed:
  • Qidi Zhang
  • Leonard F.S. Wang
  • Yapo Yang

Abstract

We adopt a mixed oligopoly model, where a state‐owned welfare‐maximizing public firm competes with a profit‐maximizing private firm, to compare the welfare effects of the specific and ad valorem tax in the presence of the shadow cost of public funds. Following the assumption of most previous literature that total output is constant under specific and ad valorem taxation, we find that, when the shadow cost of public funds exists, the tax policy must be adjusted according to the privatization level of the public firm; if the privatization level is low (medium, high), the government needs to adopt ad valorem (specific, ad valorem) tax. Moreover, the private firm will earn a higher (lower) profit under ad valorem tax than under specific tax, if the public firm is not fully privatized and the shadow cost of public funds is high (low).

Suggested Citation

  • Qidi Zhang & Leonard F.S. Wang & Yapo Yang, 2020. "Indirect taxation with shadow cost of public funds in mixed oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 415-425, April.
  • Handle: RePEc:wly:mgtdec:v:41:y:2020:i:3:p:415-425
    DOI: 10.1002/mde.3110
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/mde.3110
    Download Restriction: no

    File URL: https://libkey.io/10.1002/mde.3110?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Jen-Yao Lee & Leonard F. S. Wang, 2018. "Foreign competition and optimal privatization with excess burden of taxation," Journal of Economics, Springer, vol. 125(2), pages 189-204, October.
    3. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "The efficiency of indirect taxes under imperfect competition," Journal of Public Economics, Elsevier, vol. 81(2), pages 231-251, August.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    5. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "Tax incidence in differentiated product oligopoly," Journal of Public Economics, Elsevier, vol. 81(2), pages 173-192, August.
    6. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-298, April.
    7. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November.
    8. Sato, Susumu & Matsumura, Toshihiro, 2019. "Shadow cost of public funds and privatization policies," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    9. Mujumdar, Sudesh & Pal, Debashis, 1998. "Effects of indirect taxation in a mixed oligopoly," Economics Letters, Elsevier, vol. 58(2), pages 199-204, February.
    10. repec:wly:soecon:v:82:2:y:2015:p:416-429 is not listed on IDEAS
    11. Susumu Cato & Toshihiro Matsumura, 2013. "Long-Run Effects of Tax Policies in a Mixed Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(2), pages 215-240, June.
    12. Susumu Sato & Toshihiro Matsumura, 2019. "Dynamic Privatization Policy," Manchester School, University of Manchester, vol. 87(1), pages 37-59, January.
    13. Leonard Wang & Tien-Der Han, 2015. "Better governance matters optimal privatization policy," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 189-206, December.
    14. Harvey E. Lapan & David A. Hennessy, 2011. "Unit versus Ad Valorem Taxes in Multiproduct Cournot Oligopoly," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(1), pages 125-138, February.
    15. Xu, Lili & Lee, Sang-Ho, 2018. "The timing of environmental policies with excess burden of taxation in free-entry mixed markets," MPRA Paper 83560, University Library of Munich, Germany.
    16. Henrik Vetter, 2017. "Commodity taxes and welfare under endogenous market conduct," Journal of Economics, Springer, vol. 122(2), pages 137-154, October.
    17. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, March.
    18. Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2018. "Specific versus ad valorem taxes in the presence of cost and quality differences," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1197-1214, October.
    19. Helmuts Azacis & David R Collie, 2018. "Taxation and the sustainability of collusion: ad valorem versus specific taxes," Journal of Economics, Springer, vol. 125(2), pages 173-188, October.
    20. Wang, Leonard F.S. & Zeng, Chenhang & Zhang, Qidi, 2019. "Indirect taxation and undesirable competition," Economics Letters, Elsevier, vol. 181(C), pages 104-106.
    21. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
    22. Carlo Capuano & Giuseppe De Feo, 2010. "Privatization in Oligopoly: the Impact of the Shadow Cost of Public Funds," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 175-208.
    23. X. Wang & Jingang Zhao, 2009. "On the efficiency of indirect taxes in differentiated oligopolies with asymmetric costs," Journal of Economics, Springer, vol. 96(3), pages 223-239, April.
    24. Xu, Lili & Lee, Sang-Ho, 2018. "Environmental policies with excess burden of taxation in free-entry mixed markets," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 1-13.
    25. Xu, Lili & Lee, Sang-Ho & Wang, Leonard F.S., 2016. "Free trade agreements and privatization policy with an excess burden of taxation," Japan and the World Economy, Elsevier, vol. 37, pages 55-64.
    26. Chia-Chi Wang & Jiunn-Rong Chiou, 2015. "Optimal privatization policy in the presence of network externalities," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 514-527.
    27. Häckner, Jonas & Herzing, Mathias, 2016. "Welfare effects of taxation in oligopolistic markets," Journal of Economic Theory, Elsevier, vol. 163(C), pages 141-166.
    28. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
    29. Toshihiro Matsumura & Yoshihiro Tomaru, 2013. "Mixed duopoly, privatization, and subsidization with excess burden of taxation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(2), pages 526-554, May.
    30. Vincenzo Denicolo & Massimo Matteuzzi, 2000. "Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(3), pages 335-342, May.
    31. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
    32. Colombo, Luca & Labrecciosa, Paola, 2013. "How should commodities be taxed? A supergame-theoretic analysis," Journal of Public Economics, Elsevier, vol. 97(C), pages 196-205.
    33. Wang F.S., Leonard & Chen, Tai-Liang, 2011. "Privatization, Efficiency Gap, and Subsidization with Excess Taxation Burden," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(1), pages 55-68, June.
    34. Leahy, Dermot & Montagna, Catia, 2001. "Strategic Trade Policy with Heterogeneous Costs," Bulletin of Economic Research, Wiley Blackwell, vol. 53(3), pages 177-182, July.
    35. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-138, March.
    36. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
    37. de Fraja, Giovanni & Delbono, Flavio, 1989. "Alternative Strategies of a Public Enterprise in Oligopoly," Oxford Economic Papers, Oxford University Press, vol. 41(2), pages 302-311, April.
    38. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
    39. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-362, June.
    40. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Junlong Chen & Chaoqun Sun & Jiali Liu, 2022. "Corporate social responsibility, consumer sensitivity, and overcapacity," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 544-554, March.
    2. Ya‐Po Yang & Qidi Zhang & Leonard F. S. Wang, 2022. "Tariff simplification, privatization, and welfare superiority," Metroeconomica, Wiley Blackwell, vol. 73(2), pages 683-707, May.
    3. Xingtang Wang & Leonard F. S. Wang, 2022. "Indirect taxation, quality choice, and social welfare," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1764-1772, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hong Hwang & Chao-Cheng Mai & Ya-Po Yang, 2015. "Specific vs Ad Valorem Strategic Export Subsidies with Taxation Distortion," Review of Development Economics, Wiley Blackwell, vol. 19(4), pages 820-828, November.
    2. Chen, Ding & Wang, Leonard F.S. & Lee, Jen-yao, 2019. "Foreign ownership, privatization and subsidization with shadow cost of public funds," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    3. Jen-Yao Lee & Leonard F. S. Wang, 2018. "Foreign competition and optimal privatization with excess burden of taxation," Journal of Economics, Springer, vol. 125(2), pages 189-204, October.
    4. Sato, Susumu & Matsumura, Toshihiro, 2019. "Shadow cost of public funds and privatization policies," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    5. Xingtang Wang & Leonard F. S. Wang, 2022. "Indirect taxation, quality choice, and social welfare," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1764-1772, September.
    6. K.L. Glen Ueng & Tsaur‐Chin Wu & Chih‐Ta Yen & Chih‐Ting Chou, 2022. "Market concentration and superiority among strategic export subsidy policies with taxation distortion and cost heterogeneity," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(2), pages 276-292, April.
    7. Helmuts Azacis & David R Collie, 2018. "Taxation and the sustainability of collusion: ad valorem versus specific taxes," Journal of Economics, Springer, vol. 125(2), pages 173-188, October.
    8. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    9. Sato, Susumu & Matsumura, Toshihiro, 2018. "Flexible Privatization Policy in Free-Entry Markets," MPRA Paper 88444, University Library of Munich, Germany.
    10. Yi Liu & Toshihiro Matsumura & Chenhang Zeng, 2021. "The relationship between privatization and corporate taxation policies," Journal of Economics, Springer, vol. 133(1), pages 85-101, June.
    11. Amarjyoti Mahanta, 2023. "Ad valorem tax versus tax per unit of output in a Bertrand competition with strictly increasing marginal cost," Indian Economic Review, Springer, vol. 58(1), pages 105-117, June.
    12. Ya‐Po Yang & Qidi Zhang & Leonard F. S. Wang, 2022. "Tariff simplification, privatization, and welfare superiority," Metroeconomica, Wiley Blackwell, vol. 73(2), pages 683-707, May.
    13. Stamatopoulos, Giorgos, 2019. "A strategic tax mechanism," MPRA Paper 93602, University Library of Munich, Germany.
    14. Mickaël Beaud & Thierry Blayac & Patrice Bougette & Soufiane Khoudmi & Philippe Mahenc & Stéphane Mussard, 2013. "Estimation du coût d'opportunité des fonds publics pour l'économie française," Working Papers halshs-01077141, HAL.
    15. Chen, Jiaqi & Lee, Sang-ho & Muminov, Timur K., 2019. "Time-inconsistent Output Subsidy/Tax Policies in Free-entry Mixed Markets," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 60(1), pages 61-77, June.
    16. Ming Hsin Lin & Toshihiro Matsumura, 2018. "Optimal Privatisation Policy under Private Leadership in Mixed Oligopolies," Arthaniti: Journal of Economic Theory and Practice, , vol. 17(1), pages 1-14, June.
    17. Henrik Vetter, 2016. "Tax Reform in Monopolistic Competition with Increasing Preferences for Variety," Public Finance Review, , vol. 44(2), pages 245-262, March.
    18. Neelanjan Sen & Rajit Biswas, 2017. "Indirect Taxes in Oligopoly in Presence of Licensing Opportunities," Journal of Industry, Competition and Trade, Springer, vol. 17(1), pages 61-82, March.
    19. Adachi, Takanori & Fabinger, Michal, 2022. "Pass-through, welfare, and incidence under imperfect competition," Journal of Public Economics, Elsevier, vol. 211(C).
    20. Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2018. "Specific versus ad valorem taxes in the presence of cost and quality differences," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1197-1214, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:41:y:2020:i:3:p:415-425. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/7976 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.