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Optimal fiscal policies and market structures with monopolistic competition

Cheng-wei Chang () and Ching-chong Lai
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Cheng-wei Chang: Tunghai University
Ching-chong Lai: Academia Sinica

International Tax and Public Finance, 2021, vol. 28, issue 6, No 5, 1385-1411

Abstract: Abstract This paper develops a unified imperfectly competitive macroeconomic model, and uses it to analyze optimal fiscal policies in the presence of market imperfections. The salient feature of the model is that it is able to deal with three distinct types of market structure, including constant monopoly firms, endogenous monopoly firms and endogenous overhead costs. Several findings emerge from the analysis. First, the extent of production externalities will vary under the three distinct market structures, and in turn lead the government to implement different labor and capital tax policies to correct the different extents of the distortions. Second, the optimal ratio of government expenditure is determined solely by the extent of productive government spending if the number of firms is constant, while the optimal ratio is related to the internal increasing returns to scale and production specialization if the number of firms is determined endogenously. Finally, free entry in the competitive equilibrium may result in over entry or under entry, depending upon the relative degree between monopoly power and production specialization.

Keywords: Imperfect competition; Excess entry theorem; Optimal fiscal policies (search for similar items in EconPapers)
JEL-codes: E21 E62 H41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10797-020-09645-y

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