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Indirect taxation with shadow cost of public funds in mixed oligopoly
Author(s) -
Zhang Qidi,
Wang Leonard F.S.,
Yang Yapo
Publication year - 2020
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3110
Subject(s) - ad valorem tax , oligopoly , economics , microeconomics , shadow (psychology) , profit (economics) , welfare , public economics , tax reform , monetary economics , business , market economy , psychotherapist , psychology
Abstract We adopt a mixed oligopoly model, where a state‐owned welfare‐maximizing public firm competes with a profit‐maximizing private firm, to compare the welfare effects of the specific and ad valorem tax in the presence of the shadow cost of public funds. Following the assumption of most previous literature that total output is constant under specific and ad valorem taxation, we find that, when the shadow cost of public funds exists, the tax policy must be adjusted according to the privatization level of the public firm; if the privatization level is low (medium, high), the government needs to adopt ad valorem (specific, ad valorem) tax. Moreover, the private firm will earn a higher (lower) profit under ad valorem tax than under specific tax, if the public firm is not fully privatized and the shadow cost of public funds is high (low).