Download This PaperTaxation and Durable Goods Monopoly
38 Pages Posted: 25 Sep 2017 Last revised: 26 May 2022
Date Written: February 15, 2022
Abstract
This paper studies the role of taxation in durable good markets with dynamic monopolies. By conditioning the marginal tax rate on the volume of trade, the regulator can provide incentives for the monopolist to accelerate trade. When marginal cost pricing is incentive-feasible, tax policy with "back-loaded subsidy" can induce the first-best allocation with budget neutrality. When marginal cost pricing generates a loss for the monopolist, strategic delay cannot be avoided under regulatory budget constraint. Reducing delay then requires different forms of tax policy depending on the monopolist's commitment power. In particular, without commitment, "front-loaded subsidy" improves welfare.
Keywords: Durable goods monopoly, bargaining, optimal taxation, regulation, commitment
JEL Classification: C78, H21, L12, L51
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