The Efficiency of Indirect Taxes Under Imperfect Competition

Simon Anderson, André de Palma (adepalmajl@gmail.com) and Brent Kreider (bkreider@iastate.edu)

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper considers the relative efficiency of ad valorem and unit taxes in imperfectly competitive markets. We provide a simple proof that ad valorem taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. Ad valorem taxation is superior with free entry under Cournot competition, but not necessarily under price competition when consumers value variety.

Date: 2001-08-01
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Published in Journal of Public Economics, August 2001,, pp. 231-251

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Related works:
Journal Article: The efficiency of indirect taxes under imperfect competition (2001)
Working Paper: The Efficiency of Indirect Taxes under Imperfect Competition (2000)
Working Paper: The efficiency of indirect taxes under imperfect competition (1999)
Working Paper: The Efficiency of Indirect Taxes Under Imperfect Competition (1999)
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