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Optimal taxation with monopolistic competition

Reinhorn, L.J.

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Abstract

This paper studies optimal taxation in a Dixit–Stiglitz model of monopolistic competition. In this setting, taxes may be used as an instrument to offset distortions caused by producer markups. Since markups tend to be higher in industries where firms face less elastic demand, tax rates will be pushed lower in these industries. This tends to work against the familiar inverse elasticities intuition associated with the Ramsey tax rule. However, a key feature of the model is that the Ramsey rule responds to the industry demand curve (Chamberlin’s DD) while the monopolistic markup is a response to the demand curve faced by firms (Chamberlin’s dd). Hence, the elasticities of both these curves influence the optimal tax rate, but in opposite directions.

Citation

Reinhorn, L. (2012). Optimal taxation with monopolistic competition. International Tax and Public Finance, 19(2), 216-236. https://doi.org/10.1007/s10797-011-9182-z

Journal Article Type Article
Publication Date 2012-04
Deposit Date Jul 20, 2011
Publicly Available Date Mar 29, 2024
Journal International Tax and Public Finance
Print ISSN 0927-5940
Electronic ISSN 1573-6970
Publisher Springer
Peer Reviewed Peer Reviewed
Volume 19
Issue 2
Pages 216-236
DOI https://doi.org/10.1007/s10797-011-9182-z
Keywords Optimal taxation, Monopolistic competition.
Public URL https://durham-repository.worktribe.com/output/1529656

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Copyright Statement
The original publication is available at www.springerlink.com




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