Unit Taxes and Ad Valorem Taxes with Vertically Differentiated Products
Authors
Pedro Mendi
Francisco Galera
Juan Carlos Molero
Type
Article
Publisher
Applied Economics Letters, Vol. 21 No. 17
Pages
1221-1225
Date
21-01-2015

This article analyses a model in which a local monopolist that produces low-quality goods competes against a foreign competitive industry that produces a higher quality version of the goods. We use the model to analyse the welfare implications of introducing a unit tax on the local producer, relative to an ad valorem tax. We find parameter values for which the unit tax dominates the ad valorem tax, in the sense of increasing welfare while not reducing government revenues. This result contrasts with the mainstream results on the dominance of ad valorem over unit taxes.

Applied Economics Letters, 21(17)

Article.