Taxation under Oligopoly in a General Equilibrium Setting
Taxation under oligopoly is analysed in a general equilibrium setting where the firms are large relative to the size of the economy and maximise the utility of their shareholders. It turns out that the model is an aggregative game, which simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump-sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. An ad valorem tax may decrease the price of the oligopolistic good and increase welfare. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.
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- Birgit Grodal & Egbert Dierker, 1999.
"The price normalization problem in imperfect competition and the objective of the firm,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(2), pages 257-284.
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- 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.
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- Acemoglu, Daron & Jensen, Martin Kaae, 2013. "Aggregate comparative statics," Games and Economic Behavior, Elsevier, vol. 81(C), pages 27-49.
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