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Cover of: Optimal Indirect Taxes and Subsidies under Imperfect Competition
Hao Wang

Optimal Indirect Taxes and Subsidies under Imperfect Competition

Section: Articles
Volume 174 (2018) / Issue 2, pp. 334-350 (17)
Published 05.07.2018
DOI 10.1628/093245617X14993199883414
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  • 10.1628/093245617X14993199883414
Summary
This paper considers optimal indirect taxes and subsidies in an economy with imperfect competition. All commodities are taxable. A beneficent government chooses indirect tax and subsidy rates to maximize consumer utility, conditional on raising certain tax revenue. This paper finds that the government's optimal taxes and subsidies should equalize the after-tax Lerner indexes (or price-to-marginal-cost ratios) of all commodities. The proposed tax rule eliminates the price distortions caused by market power. It thus results in welfare gain rather than deadweight loss.