Monopolistic Competition and Increasing Returns: Implications for Optimal Fiscal Policies and Over-entry

Chien-Yin (Eric) Chen () and Fu-Sheng Hung ()

Economics Bulletin, 2012, vol. 32, issue 2, 1142-1150

Abstract: By separating monopolistic competition from increasing returns to fully disentangle their corresponding effects, this paper find that optimal tax rates on factor incomes are decreasing in the degree of increasing returns, but are independent of the degree of market power. Moreover, free entry may lead to over or too little entry relative to the social optimum, depending on the relative strengths of the effects from increasing returns, market power, and congestion. These conclusions are different from the recent study that uses the same parameter to characterize increasing returns and monopolistic competition.

Keywords: Optimal fiscal policies; monopolistic competition; increasing returns; over entry; congestion (search for similar items in EconPapers)
JEL-codes: E6 H4 (search for similar items in EconPapers)
Date: 2012-04-09
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