THE COMPARISON BETWEEN AD-VALOREM AND SPECIFIC TAXATION UNDER IMPERFECT COMPETITION

This paper compares ad valorem and specific taxation in two models of oligopoly, with and without free entry. Predominantly ad valorem taxation implies a relatively low consumer price, high tax revenue and (when entry is precluded) low profits. Ad valorem taxation dominates specific taxation from the welfare perspective: the set of circumstances under which (with free entry) specific taxation raises welfare is a strict subset of that in which ad valorem taxation is welfare-improving, and in both models the maximisation of consumer welfare subject to a binding revenue constraint requires maximum reliance on ad valorem taxation.