The Efficiency of Indirect Taxes Under Imperfect Competition
This paper considers the relative efficiency of ad valorem and unit taxes in imperfectly competitive markets. We provide a simple proof that ad valorem taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. Ad valorem taxation is superior with free entry under Cournot competition, but not necessarily under price competition when consumers value variety.
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|Date of creation:||01 Aug 2001|
|Date of revision:|
|Publication status:||Published in Journal of Public Economics, August 2001,, pp. 231-251|
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