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Optimal Mixed Taxation and Market Power in a Dynamic Economy

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Abstract

This paper develops a dynamic model of optimal mixed taxation in a small open economy with two goods markets; one characterized by perfect competition and the other by market power on the production side. The purpose is to examine how the existence of market power affects the optimal structure of income, commodity, and production taxes. We show that a distortion created by monopoly power can either be targeted through a production subsidy or a reduction in the commodity tax. In turn, this means that the policy rules for marginal labor income taxation and marginal capital income taxation take the same forms as under perfect competition. We also show that the results on marginal income taxation carry over to the case of oligopolistic competition if (i) the firms are identical or (ii) their market shares are observable.

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  • Aronsson, Thomas & Wendner, Ronald, 2026. "Optimal Mixed Taxation and Market Power in a Dynamic Economy," Umeå Economic Studies 1045, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:1045
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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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