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Optimal Indirect Taxes and Subsidies under Imperfect Competition

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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.
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Document Type: Research Article

Publication date: 01 June 2018

This article was made available online on 28 July 2017 as a Fast Track article with title: "Optimal Indirect Taxes and Subsidies under Imperfect Competition".

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  • Founded as Zeitschrift für die gesamte Staatswissenschaft in 1844.

    As one of the oldest journals in the field of political economy, the Journal of Institutional and Theoretical Economics (JITE) deals traditionally with the problems of economics, social policy, and their legal framework. JITE is listed in the Journal of Economic Literature, the Social Science Citation Index, the International Bibliography of the Social Sciences, and COREJ.

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    From 2013 on all accepted articles are published in an Online First version (in their final layout) to make them searchable and citable by their DOI immediately after peer review and acceptance. Once the article is published in an issue of the journal, the Online First version will be removed.

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