Indirect Taxation and Privatization in a Model of Government's Preference

By introducing the government's preference for tax revenues into unionized mixed duopolies, this paper investigates how the preference can change the government's choice of tax regimes between ad valorem and specific taxes. Main results are as follows. Given that one of the tax regimes is predetermined, privatization never improves welfare and privatization is preferable for the government when it emphasizes its tax revenue. However, when the tax regime is {\it endogenously} determined by the government, privatization is preferable from the viewpoint of social welfare if the government heavily emphasizes its tax revenue. Thus, there are conflicts of interest between the public firm and the government: If it heavily emphasizes its tax revenue, then the government always has the incentive to levy specific tax, while the public firm has the incentive to be levied by ad valorem. However, there are no conflicts of interest between the public firm and the government when the government levies the specific tax if the government less emphasizes its tax revenue. Interestingly, the government never has the incentive for privatization if the government considers either tax as an option.