Optimal Indirect Taxes and Subsidies under Imperfect Competition

Hao Wang

Journal of Institutional and Theoretical Economics (JITE), 2018, vol. 174, issue 2, 334-350

Abstract: This paper considers optimal indirect taxes and subsidies in an economy with imperfect competition. All commodities are taxable. A beneficent government chooses indirect tax and subsidy rates to maximize consumer utility, conditional on raising certain tax revenue. This paper finds that the government's optimal taxes and subsidies should equalize the after-tax Lerner indexes (or price-to-marginal-cost ratios) of all commodities. The proposed tax rule eliminates the price distortions caused by market power. It thus results in welfare gain rather than deadweight loss.

Keywords: deadweight loss; indirect tax; imperfect competition; subsidy (search for similar items in EconPapers)
JEL-codes: D59 H21 L16 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1628/093245617X14993199883414

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