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2005•The B E Journal of Economic Analysis & PolicyOpen access

Optimal Taxation with Cournot Oligopoly

Leslie J. Reinhorn

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Abstract

Abstract This paper studies optimal linear taxation in a general equilibrium model with Cournot oligopoly. The main result is the following. With imperfect competition the tendency toward "inverse elasticities" tax rules will be weakened and may even be reversed. That is, an upward sloping relationship may exist between an industry's optimal tax rate and its own-price elasticity of demand, unlike the perfectly competitive case.

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Abstract This paper studies optimal linear taxation in a general equilibrium model with Cournot oligopoly. The main result is the following. With imperfect competition the tendency toward "inverse elasticities" tax rules will be weakened and may even be reversed. That is, an upward sloping relationship may exist between an industry's optimal tax rate and its own-price elasticity of demand, unlike the perfectly competitive case.

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Available abstract

Abstract This paper studies optimal linear taxation in a general equilibrium model with Cournot oligopoly. The main result is the following. With imperfect competition the tendency toward "inverse elasticities" tax rules will be weakened and may even be reversed. That is, an upward sloping relationship may exist between an industry's optimal tax rate and its own-price elasticity of demand, unlike the perfectly competitive case.

Key concepts: Cournot competition, Economics, Oligopoly, Inverse demand function, Imperfect competition, Microeconomics, Price elasticity of demand, Optimal tax

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