Indirect Tax Reforms and Public Goods under Imperfect Competition

This paper examines, within an imperfectly competitive environment with public goods, the welfare effects of three popular indirect tax reforms: i) a tariff cut combined with an equal increase in the consumption tax, ii) a tariff cut combined with an increase in the consumption tax that leaves consumer price unchanged, and iii) an export tax reduction combined with an equal increase in the production tax. It is shown that the welfare effects of these reforms are ambiguous, in that they depend on the strength of the consumers’ valuation of the public goods. This result contrasts existing results in the literature that ignores public goods provision.