The efficiency of indirect taxes under imperfect competition

This paper considers the relative efficiency of ad valorem and unit taxes i n imperfectly competitive markets. We provide a simple proof that ad valore m taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case f or ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. A d valorem taxation is superior with free entry under Cournot competition, b ut not necessarily under price competition when consumers value variety. (C ) 2001 Elsevier Science B.V. All rights reserved.