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The Social Cost of Optimal Taxes in an Imperfectly Competitive Economy

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Abstract

In this paper we calibrate the social cost of optimal taxes in a class of imperfectly competitive economies and examine the correspondence of this social cost with the number of tax instruments and the number and the sources of distortions. We calibrate the Ramsey equilibrium for three standard models of imperfect competition. These settings are different in number of sources of market distortion and number of tax instruments. Our calibration clearly shows that optimal taxes in an imperfectly competitive economy incur lower social cost than those in a competitive economy, implying that they are generally more efficient as competition enhancing policy tools. We find that optimal taxes in our models can cost up to 48% less forgone consumption relative to those in a competitive market economy.

Suggested Citation

  • Selim, Sheikh, 2005. "The Social Cost of Optimal Taxes in an Imperfectly Competitive Economy," Cardiff Economics Working Papers E2005/6, Cardiff University, Cardiff Business School, Economics Section, revised Nov 2010.
  • Handle: RePEc:cdf:wpaper:2005/6
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    Keywords

    Optimal taxation; Ramsey Problem; Welfare Cost;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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