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Market structure, pigouvian taxation, and welfare

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  • Rajeev Goel
  • Edward Hsieh

Abstract

Using a short-run partial equilibrium model of social welfare, this paper examines the social welfare implications of changing Pigouvian taxes under three markets: perfect competition, monopoly, and Cournot oligopoly. The result for perfect competition supports the earlier finding that Pigouvian taxation increases social welfare [Buchanan, 1969]. However, in contrast to the previous result that Pigouvian taxes lower welfare under monopoly, the authors show that if the noncompetitive distortion is small, these taxes might still be useful in correcting monopoly-generated externalities and in improving social welfare. Cournot firms react to the tax depending upon their individual perceptions of the gain in post-tax marginal revenue. Policy implications of the study's results are discussed. Copyright International Atlantic Economic Society 1997

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  • Rajeev Goel & Edward Hsieh, 1997. "Market structure, pigouvian taxation, and welfare," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(2), pages 128-138, June.
    • Handle: RePEc:kap:atlecj:v:25:y:1997:i:2:p:128-138
    DOI: 10.1007/BF02298380
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    References listed on IDEAS

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    1. Michael L. Katz & Harvey S. Rosen, 1985. "Tax Analysis in an Oligopoly Model," Public Finance Review, , vol. 13(1), pages 3-20, January.
    2. Levin, Dan, 1985. "Taxation within Cournot oligopoly," Journal of Public Economics, Elsevier, vol. 27(3), pages 281-290, August.
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    4. Dennis W. Carlton & Glenn C. Loury, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 559-566.
    5. Martin, Robert E., 1986. "Externality regulation and the monopoly firm," Journal of Public Economics, Elsevier, vol. 29(3), pages 347-362, April.
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    7. F. H. Hahn, 1962. "The Stability of the Cournot Oligopoly Solution," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(4), pages 329-331.
    8. Mitchell Polinsky, A. & Shavell, Steven, 1982. "Pigouvian taxation with administrative costs," Journal of Public Economics, Elsevier, vol. 19(3), pages 385-394, December.
    9. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
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    Cited by:

    1. Chorng-Jian Liu & Chao-Cheng Mai & Fu-Chuan Lai & Wen-Chung Guo, 2010. "Pollution, Factor Ownerships, and Emission Taxes," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(2), pages 209-216, June.
    2. Goel, Rajeev K. & Hsieh, Edward W.T., 2006. "On coordinating environmental policy and technology policy," Journal of Policy Modeling, Elsevier, vol. 28(8), pages 897-908, November.
    3. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 211-234, December.

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