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Taxation under oligopoly in a general equilibrium setting

David Collie

Journal of Public Economic Theory, 2019, vol. 21, issue 4, 738-753

Abstract: Taxation under oligopoly is analyzed in a general equilibrium setting where the firms are large relative to the size of the economy and maximize the utility of their shareholders. Assuming that preferences are either identical and homothetic or identical and quasi‐linear, then the oligopoly model is an aggregative game, which greatly simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump‐sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. A profits tax is shown to be superior to a lump‐sum tax. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.

Date: 2019
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https://doi.org/10.1111/jpet.12373

Related works:
Working Paper: Taxation under Oligopoly in a General Equilibrium Setting (2015) Downloads
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Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders

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