Working Paper: NBER ID: w9416
Authors: Gilbert E. Metcalf; George Norman
Abstract: We examine the interplay between market structure and the form that commodity taxation should take in a general equilibrium model in which firms produce differentiated products and so are able to exert market power. Our analysis takes account of two important recent developments that affect market structure and so the appropriate design and effectiveness of commodity taxation: market deregulation and technological change. When market deregulation facilitates price discrimination, we find that tax policy is ineffective as a means to influence market structure. We further show that when tax rates are set optimally government is able to neutralize the potentially detrimental welfare impact of restrictive entry conditions in the differentiated product sector. Finally, we present conditions under which price discrimination is welfare improving.
Keywords: No keywords provided
JEL Codes: D43; H20; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price discrimination (D40) | Ineffectiveness of tax policy (H29) |
| Government tax policy (H29) | Welfare outcomes (I38) |
| Optimal tax rate settings (H21) | Neutralization of welfare impacts from restrictive entry conditions (I38) |