CORRECTIVE TAX AND SUBSIDY POLICIES IN ECONOMIES WITH BERTRAND COMPETITION

This paper shows how we can correct market failure due to imperfect competition by using taxes and subsidies. The analysis is carried out at the general equilibrium level and the importance of objective demand curves is stressed. The main conclusions are: first, it is possible to tax the economy back to the Walrasian equilibrium by using linear taxes and subsidies; second, the welfare theorem holds in an imperfectly competitive economy with corrective taxes and subsidies; third, a competitive equilibrium can also be achieved by the use of ad valorem taxes and specific output subsidies.