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Tax Incidence with Imperfect Competition: Main Results

Tax Incidence with Imperfect Competition: Main Results. Some of the competitive results do not carry over : excise taxes are shared according to the relative price elasticities, holding revenue fixed, it does not matter whether the excise tax is ad valorem or specific, and

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Tax Incidence with Imperfect Competition: Main Results

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  1. Tax Incidence with Imperfect Competition: Main Results • Some of the competitive results do not carry over: • excise taxes are shared according to the relative price elasticities, • holding revenue fixed, it does not matter whether the excise tax is ad valorem or specific, and • a tax’s incidence is fully summarized by its effect on demand price • the marginal deadweight cost of the first bit of taxation is zero • Market Structure I: Profits are Limited by Demand • taxes are like any other cost, regardless of who pays them • specific taxes are more distortionary/have a larger effect on demand price per tax dollar • ad valorem taxes are partly a profits tax • taxes can increase supply prices, especially when they are specific • the marginal deadweight cost taxes is strictly positive • Market Structure II: Profits are Limited by Entry • with a homogeneous entry cost, looks like the competitive case

  2. T’ = government revenue v’ = profits w/ taxes E = dwc of monopoly firm’s supply curve demand price T’ E Ad Valorem Taxes Combine Specific Excise and Pure Profit Taxes firm’s marginal cost curve firm’s demand

  3. T’ = government revenue Dv = lost profits D+(part of)Dv = dwc of taxes E = dwc of monopoly typical firm’s supply curve D T’ E Ad Valorem Tax Incidence typical firm’s marginal cost curve industry demand

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