Optimal taxation with monopolistic competition
نویسنده
چکیده
This paper studies optimal taxation in a DixitStiglitz model of monopolistic competition. In this setting, taxes may be used as an instrument to o¤set distortions caused by producer markups. Since markups tend to be higher in industries where rms face less elastic demand, tax rates will be pushed lower in these industries. This tends to work against the familiar inverse elasticities intuition associated with the Ramsey tax rule. However, a key feature of the model is that the Ramsey rule responds to the industry demand curve (Chamberlins DD) while the monopolistic markup is a response to the demand curve faced by rms (Chamberlins dd). Hence the elasticities of both these curves inuence the optimal tax rate, but in opposite directions. JEL Classi cation: D43, H21
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