All Title Author
Keywords Abstract

The Welfare Comparison of Ad-Valorem Tax and Specific Tax with Both Quality and Quantity Choice of a Consumer

DOI: 10.4236/tel.2017.76122, PP. 1797-1813

Keywords: Quality Choice of a Consumer, Specific Tax, Ad-Valorem Tax, Substitution Effect, Welfare Comparison

Full-Text   Cite this paper   Add to My Lib


This paper compares ad-valorem and specific taxation in models where a representative consumer with an exogenous income has both a quality and a quantity choice under perfect competition. In the setting, while ad-valorem tax causes income effect only, specific tax causes both income effect and substitution effect. Therefore, ad-valorem tax decreases consumer demand for both quality and quantity; on the other hand, specific tax decreases consumer demand for quantity. However, the sign of consumer demand for quality is ambiguous and is determined by the curvature of marginal utility on quantity. Additionally, using a constant elasticity of substitution (CES) utility function and a linear price function, we show that ad-valorem tax is superior to specific tax except for the Leontief preference under which the two forms of commodity taxes generate the same tax revenue. The substitution effect caused by specific tax disappears if the elasticity of substitution converges to zero.


[1]  Suits, D.B. and Musgrave, R.A. (1953) Ad Valorem and Unit Taxes Compared. The Quarterly Journal of Economics, 67, 598-604.
[2]  Delipalla, S. and Keen, M. (1992) The Comparison between Ad Valorem and Specific Taxation under Imperfect Competition. Journal of Public Economics, 49, 351-367.
[3]  Skeath, S.E. and Trandel, G.A. (1994) A Pareto Comparison of Ad Valorem and Unit Taxes in Noncompetitive Environments. Journal of Public Economics, 53, 53-71.
[4]  Myles, G.D. (1996) Imperfect Competition and the Optimal Combination of Ad Valorem and Specific Taxation. International Tax and Public Finance, 3, 29-44.
[5]  Denicoló, V. and Matteuzzi, M. (2000) Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies. International Tax and Public Finance, 7, 335-342.
[6]  Anderson, S.P., de Palma, A. and Kreider, B. (2001) The Efficiency of Indirect Taxes under Imperfect Competition. Journal of Public Economics, 81, 231-251.
[7]  Aiura, H. and Ogawa, H. (2013) Unit Tax versus Ad Valorem Tax: A Tax Competition Model with Cross-Border Shopping. Journal of Public Economics, 105, 30-38.
[8]  Kay, J.A. and Keen, M.J. (1983) How Should Commodities Be Taxed? European Economic Review, 23, 339-358.
[9]  Kay, J.A. and Keen, M.J. (1991) Product Quality under Specific and Ad Valorem Taxation. Public Finance Quarterly, 19, 371-385.
[10]  Delipalla, S. and Keen, M. (2006) Product Quality and the Optimal Structure of Commodity Taxes. Journal of Public Economic Theory, 8, 547-554.
[11]  Bastani, S., Blomquist, S. and Micheletto, L. (2016) Optimal Commodity Taxation with Varying Quality of Goods. Research in Economics, 70, 89-100.
[12]  Atkinson, A.B. and Stiglitz, J.E. (1976) The Design of Tax Structure: Direct versus Indirect Taxation. Journal of Public Economics, 6, 55-75.
[13]  Houthakker, H.S. (1952) Compensated Changes in Quantities and Qualities Consumed. The Review of Economic Studies, 19, 155-164.
[14]  Atkinson, A.B. and Stiglitz, J.E. (1972) The Structure of Indirect Taxation and Economic Efficiency. Journal of Public Economics, 1, 97-119.


comments powered by Disqus