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The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition

Author

Listed:
  • Sofia Delipalla
  • Michael Keen

Abstract

This paper compares ad valorem and specific taxation in two models of oligopoly, with and without free entry. Predominantly ad valorem taxation implies a relative low consumer price, high tax revenue and (when entry is precluded) low profits. Ad valorem taxation dominates specific from the welfare perspective: the set of circumstances under which (with free entry) specific taxation raises welfare is a strict subset of that in which ad valorem taxation is welfare-improving, and in both models the maximization of consumer welfare subject to a binding revenue constraint requires maximum reliance on ad valorem taxation.

Suggested Citation

  • Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Paper 821, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:821
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    File URL: https://qed.econ.queensu.ca/working_papers/papers/qed_wp_821.pdf
    File Function: First version 1991
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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables

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