Final and intermediate goods taxation in an oligopolistic economy with free entry

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

Optimal tax rules are analyzed in an oligopolistic economy with free entry. The initial market allocation has two types of distortion: price is set above marginal cost by the oligopolistic behavior, and the advantage of increasing returns to scale is left to be unexploited by excessive entry of oligopolists. With production subsidy accompanied by a self-financing lump-sum franchise tax on oligopolistic firms, Pareto efficient allocation could be restored. Without a lump-sum tax on oligopolists, however, the second-best optimum requires taxing intermediate inputs used in the oligopolistic industry. The optimal intermediate goods taxation follows the production-side Ramsey rule to encourage the use of intermediate inputs elastic to output level, and vice versa.

Original languageEnglish
Pages (from-to)371-386
Number of pages16
JournalJournal of Public Economics
Volume42
Issue number3
DOIs
Publication statusPublished - 1990 Aug
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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