On the Non-Neutrality of Profit Taxation in a Cournot Oligopoly with Environmental Effects
7 Pages Posted: 21 Jul 2009
Date Written: December 18, 2008
Abstract
We consider the joint effect of profit and Pigouvian taxation in a model of imperfect competition. We show that, when both profit taxation and Pigouvian taxation/subsidy are used, the former is no longer neutral. The two fiscal tools are substitutes, and for any profit taxation rate there exists a unique Pigouvian tax that entails the first best outcome as an equilibrium. Our analysis therefore suggests that policy makers in charge of different taxation policies should coordinate in order to optimally design the tax menu for firms.
Keywords: externalities, Pigouvian taxation, oligopoly
JEL Classification: H23, H25, L13, Q51
Suggested Citation: Suggested Citation