The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition

Dröge, Susanne; Schröder, Philipp J. H.

doi:10.1007/s10797-007-9061-9

Cited by 22 publications

(24 citation statements)

References 23 publications

(32 reference statements)

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“…Hence, a firm's markup is relatively lower under ad valorem tax regime. Allowing firms to change their markups plays a key role in this finding and overturns the superiority of unit tax under almost identical model setting with constant markup pricing by Dröge and Schröder (2009).…”

Section: Introductionmentioning

confidence: 84%

“…If the externality is large enough, then unit taxation becomes a better instrument (Pirttilä 2002). Dröge and Schröder (2009) show that unit tax regime is optimal if the market is composed of monopolistically competitive homogenous firms. This paper contributes to this literature by showing that, first, accounting for markup variation overturns the superiority of unit taxation shown by Dröge and Schröder (2009).…”

Section: Introductionmentioning

confidence: 99%

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Tax efficiency in a model of endogenous markups

Durceylan

2019

SERIEs

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Efficiency comparison of ad valorem and unit taxes has been traditionally based on consumer welfare. However, if the tax instrument also affects the distribution of firms over their productivities, the policy maker may be concerned about the implications on aggregate productivity as well. This paper makes an efficiency comparison of ad valorem and unit taxes by allowing the distribution of firms to respond to changes in policy. First, I make an efficiency comparison in a model with monopolistically competitive firms that are homogenous with respect to their productivity levels. Consumer preferences exhibit love for variety and allow firms to adjust their markups. I find that ad valorem tax is more efficient. Allowing for firm heterogeneity overturns this result at high revenue requirements. As the tax rate increases, ad valorem tax causes excessive exit of firms which makes the market more competitive. Hence, few surviving firms price lower by decreasing their markups. Lower prices decrease the tax revenue collected. As a result under ad valorem tax regime, higher consumer surplus is dominated by lower tax revenue. On the other hand, production is concentrated among relatively more productive firms. Thus, aggregate productivity is higher under ad valorem tax regime.

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Section: Introductionmentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

Tax efficiency in a model of endogenous markups

Durceylan

2019

SERIEs

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“…As a matter of fact, the balance between specific and ad valorem taxes or subsidies has been a central concern in the European Community's programme for the harmonization of cigarette taxes. The comparison of specific and ad valorem taxes and subsidies has been analyzed by a number of authors (for example, see Hillman and Templeman, ; Skeath and Trandel, ; Hwang et al, ; Jorgensen and Schroder, ; Collie, ; Shea and Shea, ; Dorge and Schroder, ; Lapan and Hennessy, ; Kotsogiannis and Serfes, ; and Blackorby and Murty, ). In particular, Hillman and Templeman () compare the social welfare between specific tariff and ad valorem tariff in an import monopoly market and conclude that an ad valorem tariff is necessarily superior to a specific tariff.…”

Section: Introductionmentioning

confidence: 99%

Specific vs Ad Valorem Strategic Export Subsidies with Taxation Distortion

Hwang

Mai

Yang

2015

Review Development Economics

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This paper employs a model to compare the welfare between optimal specific and ad valorem export subsidies if the subsidy payment is financed by distortional taxation. It is found that the welfare under the specific subsidy regime is higher (lower) than that under the ad valorem subsidy regime if the social cost of taxation distortion is low (high). Moreover, the signs of the two optimal subsidies are also crucially dependent on this social cost. They are positive (negative) if the social cost is low (high).

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“…1 However, the superiority of ad valorem taxation may no longer result in general equilibrium settings (Grazzini 2006, Blackorby andMurty 2007), under Bertrand competition with product differentiation (Anderson et al 2001), in the presence of externalities (Dickie and Trandel 1996, Pirttilä 2002, Dröge and Schröder 2008, in two-sided markets (Kind et al 2009), in multi-product oligopoly settings (Hamilton 2009), and even in competitive markets either with endogenous quality choices or output price uncertainty (Liu 2003, Goerke 2011). …”

Section: Introductionmentioning

confidence: 99%

The Optimal Structure of Commodity Taxation in a Monopoly with Tax Avoidance or Evasion

Goerke

2012

Public Finance Review

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If tax obligations are met, the balanced-budget substitution of an ad valorem tax on output for a specific tax not only raises a monopolist’s production but also represents a Pareto improvement. However, if tax avoidance or evasion is feasible and the marginal costs of such actions decline with the legal tax burden, a monopolist will respond to a balanced-budget substitution of an ad valorem tax for a specific tax by reducing output, while profits remain constant. Therefore, in the presence of tax avoidance or evasion activities, a move toward specific taxation can represent a Pareto improvement.

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The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition

Abstract: Externalities, Monopolistic competition, Taxes, Specific taxes, Welfare, H23, L13,

Cited by 22 publications

References 23 publications

Tax efficiency in a model of endogenous markups

Tax efficiency in a model of endogenous markups

Specific vs Ad Valorem Strategic Export Subsidies with Taxation Distortion

The Optimal Structure of Commodity Taxation in a Monopoly with Tax Avoidance or Evasion

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