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Commodity taxes and welfare under endogenous market conduct

Henrik Vetter ()
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Journal of Economics, 2017, vol. 122, issue 2, 137-154

Abstract: Abstract We consider consumption taxes in a model of endogenous Cournot versus Bertrand competition. It is argued that when the choice of unit versus ad valorem taxes affects longer-term decisions beyond the customary price or quantity decisions, the mix of the two taxes co-determines market conduct. This gives ad valorem taxes an anti-competitive effect that harms ad valorem taxes’ efficiency in comparison with unit taxes. We show that a mix of the taxes—or a unit tax alone if we compare one or the other of the taxes—is sometimes welfare superior on account of consumer-price and tax revenue effects. A practical implication of our findings is that pass-through rates are only sometimes useful guides for policy. In fact, we show when the proper response to demand for higher revenue is a higher unit tax rate and a lower ad valorem tax rate.

Keywords: Oligopoly; Endogenous market conduct; Ad valorem taxes; Unit taxes (search for similar items in EconPapers)
JEL-codes: D43 L13 H21 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:kap:jeczfn:v:122:y:2017:i:2:d:10.1007_s00712-017-0538-4